Clime Asset Management SMSF and Estate Planning Insights Holistic Wealth S olutions

1. Clime Asset ManagementSMSF and Estate Planning InsightsHolistic Wealth Solutions Integrity Transparency Conviction

2. Introduction MICHAEL KLOECKNER Director Private Clients B Com LLB Dip Fin Super Head of Clime Super TIMING QUESTIONS

3. Disclaimer This information is intended to provide general advice only and does not take into account your particular investment objectives, financial situation or specific needs. The information provided is given in good faith and has been derived from sources believed to be reliable and accurate at the time of publication. This presentation does not purport to be comprehensive or to constitute personal advice.

4. How do I make the most of my super? • Agenda • Clime Group • What is an SMSF? • SMSF Structuring • Estate Planning Strategies • Clime’s Super Administration and Accounting Service • How Clime manages money • Clime Super and Clime Asset Management – Holistic Wealth Solution

5. Introducing the Clime Group

6. What is an SMSF? • A trust: Trustees are individual members or company • 1 to 4 members • Investments held and managed by the trustee • Beneficiaries are trustees or directors of trustee company • Purpose: provide benefits to members on retirement

7. SMSFs as at June 2013 • 60% of SMSF assets are cash, term deposits and Australian shares • 23% of SMSFs have $500K-$1M (largest single category) • 64% of SMSFs are in the accumulation phase • Shift to starting SMSFs in year 1 of pension phase • 75% of all SMSFs have individual trustees – 91% of recent

8. SMSF StructuringIndividual Trustees Structure Trustees: Ben Graham, Kate Graham Superannuation Fund: Graham Family Superannuation Fund Fund Members: Ben Graham, Kate Graham

9. SMSF StructuringCorporate Trustee Structure Trustee ValuePty Ltd Directors: Ben Graham, Kate Graham Superannuation Fund: Graham Family Superannuation Fund Fund Members: Ben Graham, Kate Graham

10. SMSF StructuringCorporate Trustee vs Individual Trustees • A company is a legal entity existing in perpetuity • One trustee instead of two can operate • Simpler to register assets in one name Value Pty Ltd • No need to re-register assets on death of a member • Avoids costs, trauma and probate later • No need for an outsider if you are a single member SMSF • Easy to enter and exit memberseg. children, divorce, attorneys • Allows corporate powers of attorney to act in incapacity

11. Franked Dividends – SMSF magic • Company tax has been paid by the company • Company pays a dividend • Shareholder has access to 30% prepaid tax as a franking credit • Franking credits offset tax payable by your SMSF in accumulation mode • If no tax is payable in pension mode obtain tax credit yield enhancement • Only available when investing direct in Australian shares

12. Some Responsibilities of Trustees • Document investment strategy, ensure binding death nominations in place and a compliant trust deed • Keep it separate – bank a/c, assets in trustee & funds name • Accept contributions and pay benefits • Document everything - minutes • Annual financial statements, regulatory returns, tax returns and audit • Legislative compliance – SIS Act, Tax Acts, Trust deed, Corporation Acts

13. Combining administration, accounting, super strategy, estate planning • Keeps you compliant e.g. • Contribution tracking • SMSF administration, accounting and tax return • Licenced Audit – prep and lodgement • Manages all the paperwork • Receives the mail and acts on it • Pays ATO, ASIC, Fees • Online, real-time access to information • No more waiting till year end • Access to specialist strategic super and estate planning advice

14. Estate Planning Insights • Estate – what you want to happen (SMSF and will)(Intention) • Will – what happens (excludes SMSF unless BDN) • – lump sum in simple will unless testamentary trust will (Actual) • EPOA – Granting legal capacity (SMSF) while you are alive • Funds Management – travel, family, incapacity, death

15. Incorporating Super into your Estate Plan • Super does not form part of a person’s ‘estate’ assets, and can therefore not be included in a will • A member can include their super’s death benefit in their estate by completing binding-death nomination

16. Death benefit nominations • The payment of a death benefit is ultimately a matter of trustee discretion • There are two options most super funds allow that help ensure benefits go to an intended recipient: • A binding death benefit nomination, and • Non-binding death benefit nomination

17. Non-binding death benefit nominations • This acts as a guide for the trustee as to the preferred benefit recipients • Ultimately the trustee makes the decision in light of all the relevant circumstances

18. Binding death nominations • Provided the trust deed allows, a valid nomination binds the trustee to pay death benefits to the preferred recipient • Binding death nominations must be clearly stated and recipients must be dependants or legal representatives of the member

19. What’s the best structure for you? • When preparing an estate plan it is critical that people consider how their superannuation benefits will be dealt with if they die • The importance of this is highlighted by the New South Wales case of Katz v Grossman

20. Katz vs Grossman • The facts of this case were as follows: • Ervin and Evelyn Katz had an individual trustees SMSF. Evelyn died in 2000. • Ervin had made a non-binding nomination of beneficiary in which he indicated that he wanted his superannuation benefit to be divided equally between Daniel (son) and Linda (daughter). When Evelyn died Ervin appointed Linda co-trustee. • When Ervin died in 2003, Linda appointed her husband Peter(bad guy) as a trustee. • Linda and Peter refused to follow Ervin’s non-binding nomination and decided to pay the entire benefit of approximately $1,000,000 to Linda. • Daniel challenged the appointment of Linda and Peter as trustees of the fund. • The Court held that both Linda and Peter were validly appointed as trustees. • As the nomination was non binding, the trustees had the discretion to pay the entire death benefit to Linda to the exclusion of Daniel.

21. Katz vs Grossman • It is therefore crucial to consider the appropriateness of binding nominations in all circumstances, although there may be circumstances in which you wish the trustee to have discretion. • In this case, if Mr Katz had made a binding nomination, his wishes would have been carried out, regardless of who took control of the superannuation fund.

22. Katz vs Grossman • Another option for Mr Katz would have been to use a corporate trustee which would have avoided the necessity to retain two individual trustees following the death of Mrs Katz. • Under this option, Mr Katz could have continued to manage the super fund in the capacity as a sole director of the trustee company and hence avoid the requirement to appoint another trustee. On his death, Mr Katz’ executors would have stepped in and taken control of the fund.

23. Katz vs Grossman • This case highlights the importance of ensuring: • Your estate plan transfers control of your superannuation fund (and the power to pay death benefits) to the right people • Changes of trustee are properly thought out, documented and retained

24. Katz vs Grossman - Summary • Consider a corporate trustee • Pass super to your spouse/estate via a binding nomination • In your Will have a Testamentary (Will) Trust

25. Binding Death Nominations • Case #2 – the recent WA case of Ioppolo & Herford vs Conti (24th Oct 2013) • Highlights the importance of making a valid binding death nomination for a SMSF, and displayed the importance of the inter relationship between BDN, trust deed and the will • Mr & Mrs Conti were married but estranged and had a SMSF, (individual trustees) • Mrs Conti in 2005 made a will in which she left all her SMSF assets to her 4 children and specifically stated she did not want any to go to her husband • In 2006 she had made a BDN to her children but it lapsed • In 2010 Mrs Conti died. • Mr Conti as sole trustee established a corporate trustee and paid the death benefit of $648,546 to himself

26. Binding Death Nominations • Case #2 (continued) • Mrs Conti’s children as executors took legal proceedings against their father • The court found against the children and even made them pay all legal costs • The court stated Mr Conti was in his rights to pay the benefits to himself as the trust deed specifically gave him the power in the absence of a valid binding death nomination • Lessons: • 1. Trust deed – read and understand. May invalidate BDN • 2. Will has no power over super (unless BDN to the estate and non lapsing/binding) • 3. Lawyer misunderstood the lack of control of the will • 4. Surviving member effectively takes control • 5. Despite specific wishes there was no legal “bad faith”

27. Testamentary Trust Wills • A testamentary trust is established by a will that comes • into effect upon the death of the will maker • Simple Will vs Testamentary Trust Will: • Rather than assets passing to the beneficiary’s name, assets pass to the trustee who holds them in trust for the benefit of the beneficiary • Main benefits: • Tax • Asset protection • Family Law

28. Testamentary Trust Wills • Case Example 1: TAX • Sally dies with a $1m of investment assets and a home worth $1m. She has setup a testamentary trust will. Her son John is the sole beneficiary. • John is a miner who himself earns $250,000 per annum and is at the highest tax bracket of 46.5%. • Income of the trust - $90,000 pa from bank interest and the rent of the property. If John inherited these funds in his own name his annual tax would be $41,850.

29. Testamentary Trust Wills • Case Example 1: TAX (continued) • If he has inherited assets in a testamentary trust he is able to make distributions to his wife and grand children (who are allowed to receive income at adult tax rates). • He distributes $18k to his wife and $18k to each of his 4 children and pays NO TAX.

30. Testamentary Trust Wills • Case Example 2: ASSET PROTECTION • Jack and Jill save their whole life and own their house, superannuation and shares totalling $3,000,000. • They have 2 children: Robert and Rachel. • Robert, is a property developer with personal guarantees on a number of large loans with the bank.

31. Testamentary Trust Wills • Case Example 2: ASSET PROTECTION (continued) • Rachel has recently separated from her husband and is facing the possibility of family law proceedings and a custody battle for her children, but has little assets. • Jack and Jill pass away and leave their assets to their children through simple wills.

32. Testamentary Trust Wills • Case Example 2: ASSET PROTECTION (continued) • Robert failed on a property development and is bankrupted. The bank and creditors take his $1.5m inheritance in the bankruptcy process. • Rachel received the inheritance and pays the amounts towards the family mortgage, spent the funds on paying out other credit card debts and leaves the remaining $1m in the bank. The family court orders her to settle on the net equity of the assets with her husband and he receives $750,000.

33. Testamentary Trust Wills • Case Example 2: ASSET PROTECTION (continued) • And FAMILY LAW • What could have been the alternative? • Robert could have had his $1.5m in a trust held beneficially for him - 100% protected from creditors in his bankruptcy. He would have lost nothing. • Rachel may have loaned money from the trust to pay her mortgage. The parents could have directed funds to a trust for the children’s education and a lesser amount may have had to go her husband in the family law proceedings.

34. Powers of Attorney • What is POA? • Power of Attorney is a formal document by which one person called the donor appoints another person to act on his behalf • Types • General Power of Attorney • Enduring Power of Attorney • Corporate Power of Attorney

35. Powers of Attorney • Type 1: General Power of Attorney • Gives someone the authority to carry out your instructions on your behalf. • Usually put in place if it is to be used for a specific intention for a specific period of time such as travel overseas. • Case example • Peter travels overseas for 6 months of the year and has to sign cheques to pay bills and wishes to have a local option in place to follow his instructions on email while he is away to manage his property and shares. He has a general power of attorney drawn up for his accountant Bill to be able to conduct his financial affairs whilst he is away.

36. Powers of Attorney • Type 2: Enduring Power of Attorney • Allows the attorney to continue in your role beyond losing capacity. • Everyone should have one! • Case example • David and Mary have a series of investments that fund their retirement and living expenses. They have enduring attorneys drawn up for their two daughters if they lose financial capacity. The daughters can, along with a medical guardianship, pay for the nursing home bond and living costs. They are able to sign to continue their pension payments and sell the family home if necessary.

37. Powers of Attorney • Type 2: Enduring Power of Attorney (continued) • Statistics show on average people are living longer and we are an ageing society. • It is more likely people will suffer longer periods of deteriorating health and declining intellectual capacities. • The most common form of intellectual capacity is dementia, with Alzheimer’s disease accounting for 50-70% of all cases.

38. Powers of Attorney • Type 2: Enduring Power of Attorney (continued) • Case example • Joe develops dementia and loses capacity to make financial decisions. His son does not have an enduring power of attorney. There is a very inconvenient and costly period while his son appeals to the courts to have one granted, along with the added time and stress dealing with banks and institutions.

39. Powers of Attorney • Type 3: Corporate Power of Attorney • Allows the role of director to be undertaken by an attorney on someone’s behalf. • This is ideally suited for a SMSF with a corporate trustee, in which parents provide their children with an attorney which allows the fund to operate in their incapacity or during overseas travel. • Graham has a corporate power of attorney for his father’s SMSF trustee, Ray Super Pty Ltd. When his father is deemed incapacitated from dementia Graham is able to continue the operation of the SMSF to pay a pension for living expenses and sign financial statements.

40. Estate Planning Strategies • Strategy Tip #1 • Right of residency or life tenancies are a simple and • easy way to ensure your main asset gets passed to your bloodline.Case example:Most homes are owned by a husband and wife as joint tenants.Upon death of one, property automatically reverts to the other. This means the surviving spouse can alter their will or direct their assets to a new spouse or their children.Alternative – sever the joint tenancy to tenants in common, 50% / 50% ensures no stamp duty is payable.Directed through your will, the property is left beneficially to your children with a right of residency to your spouse with legal entitlement to live in the property until their death.

41. Estate Planning Strategies • Strategy Tip #2 • Case example: Re-contribution strategy • Alan is 63 years old and his wife Mary passed away leaving him no dependents. He has an adult son who is not a dependent. His super fund has a total balance of $450,000. $300,000 of which is taxable and $150,000 tax free. If Alan passes away and a death benefit is paid to his only son George $49,500 or 16.5% tax would be taken from the benefit • Under advice, Alan withdrawals his entire balance from super and re contributes it the next day as a non concessional contribution, which means it is now tax free. He re commences a pension straight away with this $450,000 and his components are now crystallised meaning his balance would remain tax free. Any death benefit payout would not have any tax at all.

42. SMSF, Will, Estate planning, Funds management health checks • What to do? • Review your current estate plans – wills, attorneys, BDNs • Ensure you have good professionals – lawyer, accountant, fund manager • Get all wills, attorneys, binding death nominations completed NOW • Reassess your share portfolio, cash level and other investments • Take appropriate action and provide a copy to your accountant, financial adviser, family members. Review regularly. • Talk through your estate plans with your spouse and children so everyone has a clear understanding – avoids disputes later!

43. How you can manage your SMSF portfolio to a 10% net return per annum • Capital preservation is the key to maximising returns • 2. Share investing - NROE of a company determines the value • - manage actively- price follows value • - assess Australian and International opportunities • 3. Fixed Income Investing – filter out risk and price risk/reward • 4. Property investing – invest in 8% yield and 11% IRR • 5. Asset allocation constantly adjusted to achieve sustainable returns

44. The importance of capital preservation • You need a 150% return to recoup your $1,000,000 2007 $1 Million -60% $360,000 Lost +60% NOW $640,000 2009 $400,000

45. A company’s NROE determines its value • Profit is distinct from profitability • Profitability is measured by Return on Equity • Return on Equity is normalised by adding back franking credits • COMPANY A • Shareholders equity = $10,000 • Profit = $2,000 • COMPANY B • Shareholders equity = $20,000 • Profit = $3,000

46. Markets continually produce OPPORTUNITY Work hard, or, Go Fishing! Opportunity, >1000pts above Intrinsic Value Opportunity Opportunity

47. Contact Clime Group Integrity, Transparency, Conviction

48. Questions?