Having spent almost 30 years in this industry, it never ceases to amaze me just how careless some of our financial institutions are, but more importantly, just how lucky some our clients are to have planners who actually give a damn.

Last year a close colleague of mine called me several times over the period of a few weeks absolutely exasperated at the ineptitude of one of Australia’s largest financial institutions.

His client had passed away leaving a wife & 2 young children. Fortunately for the family a $2,000,000 life insurance policy had been implemented inside the client’s superannuation with the following beneficiary allocations:

  • Lump Sum payable to the spouse, +
  • Death Benefit Pensions payable to the spouse & children.

Unfortunately the beneficiary nominations had lapsed just prior to the client’s death, immediately reverting the client’s preferred outcome to one of ‘Trustee’s discretion’.

Now, given that the client (via his adviser) had provided fairly specific beneficiary allocations to ensure that the family’s income & tax position was optimised, one would assume that the Trustees would at least contact the widow or the adviser to discuss the options available to the family.

WRONG. Not only did they decide to pay the entire amount (the superannuation fund balance + the life insurance proceeds) as a lump sum to the widow, but they also failed to inform the adviser of their decision. In fact, the funds had been approved for payment & were ready to be transferred to the widow’s bank account when the adviser discovered what they were doing &, once he picked himself up off the floor, he instructed this institution to immediately put everything on hold.

He instantly sent copies of the original Statement of Advice, beneficiary nomination forms, Allocator reports & a written request from the widow to the Trustees advising them not only of the deceased client’s request, but also the widow’s preferred outcome.

Initially the Trustees dismissed the request & were hell bent on getting this claim off their books. The adviser then called me and I instructed him to contact the Trustees & inform them of the following:

  1. The deceased client had requested this initial beneficiary allocation &, even though the nomination had lapsed, it should at least be considered (particularly if the widow is comfortable with that nomination);
  2. The widow notified the Trustees, in writing, that she was indeed comfortable with the initial beneficiary allocation & would appreciate it if they would honour her deceased husband’s request;
  3. Paying the entire amount as a lump sum would not allow the widow to take advantage of the income & tax benefits that death benefit pensions provide, thus placing her family is a position of paying unnecessary ‘death taxes’ for the rest of her working life;
  4. This institution had been chosen by the adviser because they promote themselves within the financial services industry as ‘market leaders’ in the area of estate planning, yet here they were giving no regard whatsoever to the estate planning requirements of this family; &
  5. (Most importantly from the institution’s point of view) Paying all of the money into the widow’s bank account was essentially transferring all of the funds over to one of their competitors.

That last point certainly pricked their ears & eventually the following occurred:

  • A tax-free lump sum was paid to the widow allowing her to pay out her mortgage (terminate her relationship with her bank manager) + make a $300,000 undeducted contribution to her super fund;
  • Pension accounts were set up for the widow & her 2 dependent children meaning that she will be able to cover all of their future living expenses with tax-free income.

The story doesn’t end there though! The first pension payments made to the beneficiaries had an amount deducted from them for tax.

Once again my colleague called me & I informed him that he had better go back to the Trustees & kick some butts because:

  1. Firstly, the initial capital is tax-free for financial dependents & any tax that may be payable is only on the earnings of that initial capital. Given that the pension accounts had only just been set up a week or so prior to the commencement of pension payments, it is impossible for those accounts to have attracted much interest (earnings) if any;
  2. Tax on the earnings is at adult marginal rates, meaning that a beneficiary can receive almost $50,000 per annum (combined capital drawdown + earnings) before a cent of tax is paid. The children had been allocated $20,000 per annum only so NO tax is payable.

The Trustees were notified & they informed the adviser that they would need to ‘consult their legal department’. Soon after they called the adviser to apologize & the beneficiaries were reimbursed.

Looking back over this situation I think to myself: ‘what would this widow have done had she not had an adviser, particularly one who actually cares?’, ‘how much income would this family have lost from the so-called ‘deductions for tax’?’, ‘the adviser saved this family a total of over $80,000 in tax alone, but how many families in Australia are blindly paying the ATO every year simply because they have no idea about the options that are available to them?’.

Industry funds will continue to deceive Australians about the true value that advisers bring to their clients. Banks & insurance companies will continue to flog their products direct to consumers simply to make a quick buck, but as long as I have breath in my lungs I will persist in bringing these stories to the public’s attention.