The GRA Blog

Dear reader,

Thinking about and planning for our death is understandably a subject that most people prefer not to think about.

It comes as no surprise to us, because we see it every day, that many people just simply do not plan for what happens to their assets and estate when they die.

With a bit of thought and a small financial and time investment, we all have the ability to save enormous amounts of pain and money from being inflicted on the people we love after we’re gone.

Here are four estate planning issues to consider if protecting your future is important to you:

Don’t leave your residual estates to your spouses personally.
If your Will directs that your residual estate is bequeathed to your spouse you are in effect, adding to their asset base. This places assets at risk and also prolongs gifting programmes.

A better approach is to bequeath the residual assets of your estate to a Trust. Bequests under a Trust are free of gift duty restrictions meaning that the assets lie within the Trust without the need for them to be gifted.

The surviving spouse is then not burdened with the additional gifting programmes.

Not forgiving any ungifted loan balances.
If you have a Trust and you are conducting a gifting programme you need to make sure your Wills “tie in” with the Trust. This means that Wills should forgive any ungifted loan balance owed to you by the Trust. This brings gifting programmes to an end and prevents the surviving spouse from being burdened with extra gifting.

There is however an important proviso to this:

Make sure you have two Deeds of Acknowledgement of Debt – if you are to forgive any ungifted loan balance in your Will you need to make sure that you have separate Deeds of Acknowledgement of Debt.

One of the pitfalls we often see is joint Deeds of Acknowledgement of Debt. Where a Trust recognises a debt to two spouses jointly, on the death of the first spouse the survivor inherits the full gifting programme.

This is obviously not ideal and can be avoided if you have two separate Deeds of Acknowledgement of Debt and separately provide to forgive those under your Will.

Not thinking about the succession of your Trusts.
We often see Trusts established with the Power of Appointorship passing to a person nominated under their current Appointor’s Wills or to the executors of their estate.

Then we find that no such nomination is made in the Wills or our clients are unaware of the fact that their executors of their estates will assume this important power in respect of the Trust.

Therefore it is very important from an estate planning perspective to understand who holds the Power of Appointorship and how it is passed on. In our view the best practise is to have the Trust Deeds make it clear that a successor to holding the Power of Appointorship can be named in your Wills and name them there.

If you would like your situation reviewed, you can contact us and arrange an interview. It costs nothing to take the first step. We’ll make recommendations that will be easy to understand. And when set up, these structures will ensure that any surviving spouse or family members will not be unduly hurt.

To get personal help you can Request an Interview right now.


Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

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Dear Reader,

Under current rules, rest home care is subsidised if your asset base falls below the asset threshold test. Currently this sits at $170,000 for a single person.

What this means is if your personal asset base at the time of needing rest home care is in excess of this you will not qualify for the full subsidy and will be required to pay fees of around $600 per week. Ouch.

In assessing whether your personal asset base exceeds this amount the test looks at what assets you hold personally and ignores what assets are held in Trust. One proviso to this is that any transfer to a Trust within the last two years will likely be unwound and any gifts made within the last five years are also susceptible to challenge.

So what to do?

Firstly, it's critical that you move your asset base into a Trust as soon as possible so that there is five years breathing space between making a gift and needing rest home care.

You should also be thinking about your parents, if appropriate. If you have parents who intend to leave an inheritance to you, you should consider whether or not their assets would be better off in a Trust.

Sometimes it may seem that it is too late to start a gifting programme when in fact there is still benefit to be derived by setting up a Trust and aligning an estate plan with the Trust.

For example, whilst you can only gift $27,000 per person per annum without incurring gift duty, dispositions under a Will are exempt from gift duty. This means that a carefully drafted estate plan which bequeaths assets to a Trust upon death can immediately protect half of the relationship assets on the death of the first spouse.

In summary, moving assets into a Trust can help avoid rest home care fees. These fees can be significant and will eat into any inheritance you may leave to your children or looking upstream may be eating into any inheritance you are otherwise likely to receive.

If this sounds all a bit confusing, we understand. That's why we're offering anyone the chance to have their situation assessed by either getting a Trust Check-Up (normally $199.00 or FREE to new clients) or assistance to set up a Trust.

Otherwise to get personal help you can Request an Interview right now.


Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

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LAQC’s are ordinary limited liability companies that have a special tax status, allowing losses to flow through and capital profits of a business to be distributed tax exempt in many circumstances.

In plain English this means they allow you to receive more money by paying less tax.

Another way to look at it is that losses are “attributed” to the shareholder and capital gains can be released from the company tax-free without liquidation.

LAQC’s are particularly helpful for property investors and business owners because they allow a host of tax advantages that you can’t get with an ordinary company.

The Right Structure

An LAQC is an appropriate structure for a salaried investor. An LAQC allows a salary investor to utilise tax losses produced by the LAQC against their personal income.

Having said this, an LAQC can still be an effective structure even if you are not salaried. If you earn income via a shareholder salary from a company that you are a shareholder of, you will still be paying personal tax and can still benefit from tax losses drawn from an LAQC.

However, there may be a better option for you.

In short, if you are self employed and draw salary from entities that you control there may be other options as to how you structure loss making business activities.

If you are considering using an LAQC for property investment, for example, you should be aware that having an LAQC often means that you end up holding the shares personally which means that the structure is not ideal from an asset protection perspective.

If you are salaried and don’t have a choice as to where you earn your income, you don’t have a choice as to where you hold these shares in order to get the full tax benefit.

However, if you are self employed there may be other options including running your business through a Trading Trust and then holding rental properties through an Investment Trust or perhaps running what are known as two group companies side by side

In summary, you need to be aware that an LAQC is not a one size fits all solution. It can be advantageous from a tax perspective but it does have drawbacks from an asset protection standpoint and if you can get a mix of both you will be better off.

To find out how the right mix can help you grow your net worth faster, or to review your existing situation, go ahead and Request an Interview. The first step costs nothing.

To get personal help you can Request an Interview right now.

John Rowe
Director Business Accounting Services

Learn More about John
Contact John at jr@gra.co.nz or call +64 9 522 7955

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First of all owning property in your own name provides no asset protection. If we are talking about a personal home you are going to be far better off moving the ownership of that into a Trust from an asset protection perspective.

This stands whether or not you are in business. Certainly if you are in business you definitely should have your home owned by a Trust to protect it from risks associated with the business.

If you are not in business you still have potential uninsurable risk that you need to be mindful of and you will benefit from moving your property into a Trust. For example, there could be relationship property risks or longer term depletion of assets through payment of rest home care fees. Owning assets in the Trust protects you from these sorts of exposures.

The same also applies to investment property. From an asset protection perspective you would be better off not holding investment property personally.

From a tax standpoint there is not necessarily any disadvantage from holding property personally. In particular, if the property is making tax losses holding it personally gives you access to these tax losses.

However, it is fair to say that there is often more advantage to be gained by using a structure such as an LAQC. For example, an LAQC allows you to set up the shareholding structure amongst two spouses so that the losses are allocated in such a way as to maximise the tax refunds.

This is not so easily done with personal ownership. Furthermore, there are flexibilities that you have in running an LAQC that are not available to you personally.

For example, you can move the ownership of a property that is owned in an LAQC far more easily than a property owned personally. A property owned personally can only be moved by engaging a lawyer and conducting a conveyance to change the title of the property.

If a property is owned by an LAQC you can change the ownership of the property by changing who owns the LAQC. This is a shareholding transfer that doesn’t have the same costly implications as a change in title. In other words you avoid the cost of conveyancing and potential depreciation recovery.

For more information on how we may be able to save you money and help you achieve your money goals faster, you can Request an Interview right now.

To get personal help you can Request an Interview right now.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore. Trackbacks (0) | Permalink
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From an asset protection perspective holding property in a Trust is often the best structure available. Assets held in a Trust are not held personally and are therefore protected.

Here's another benefit...As the properties appreciate in value you do not have to gift this appreciation value as it accrues under the Trust’s ownership separate from you personally.

Plus, Trusts are also flexible when it comes to distributing capital and income. If you sell a rental property out of a Trust for a capital gain it will be easy to draw that capital gain from the Trust without any adverse tax implications. And, if you are fortunate enough to have a rental property that produces taxable income utilising the Trust to own that property will provide you with flexibility in terms of distributing that income.

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[Practical Expert Advice for Investors & Homeowners]

Dear clients, friends and supporters,

This March 2009 Economic Update is intended to be practical and free advice on interest rates and a snapshot of the current housing market.

Also in this edition I have a bit of a rant about Wall Street and what could happen this year, if financial Armageddon continues.

I hope you find this information useful.

But First…The Plug

Unusual times call for unusual measures. So, for a limited time, I am offering investors and business owners a Free Strategy Interview (normally $199) with me and my team at GRA to discuss strategy, structures and asset planning…in fact anything on your agenda that might help you to protect and grow your net worth in 2009 .

If you live outside of Auckland…no problem, we can talk over the phone and work by email.

You’ll need to be quick so go ahead and contact me.

Finally, if you find value in my message below, I ask you to kindly forward this article to your mailing list :-)

OK, let’s get started…

Interest Rates & The Property Market

I wrote to a few of you last year in September and recommended you break your fixed interest contracts, anticipating an interest rate drop.

The basis of that was the G7 resolved to underwrite interbank lending rates, which is a big part of the cost of funds we borrow ( and represented in the Libor/interbank lending rates published internationally).

I suggested last year that the new government underwriting of institutional lending and deposits ( a reaction to the liquidity crisis on Wall St ) would quickly drop cost of funds and stabilise money markets short term.

As predicted, it happened.

Rates have plummeted world wide since this time. While obvious in hindsight , - the key was working it out early so you could break of fix contracts, before the banks react and you lose the advantage.

Many of you took the advice - one person alone told me she saved $50,000 in avoided break costs with her banks. Others waited, and have reported to me they regret the wait as they have had to pay huge amounts or it is now not economic to break fixed interest contracts.

So listen up again and do it now!

Changing Money Markets

I believe the money markets have changed in the last month, with five year rates on the rise despite an anticipated drop in the OCR due.

You need to be quick to react, if you wish to lock in the longer rates before they rise.

An emerging institutional theme will be - ’someone has to pay for socialising the losses - the taxpayer and interest payer’. Rates will rise accordingly in the near future. I discuss this further below.

Current Advice - Fix Long Now ( 5 Year Rates Are At The Bottom And Rising )

The 10 year average interest rate in NZ for main trading banks to home owners is just over circa 8%.

Current interest rates are well summarised here:

Interest.co.nz is a useful site for monitoring rates and financial news.

You can currently borrow for around 6.5% fixed for 5 years - this is cheap in a NZ context. I do not think it will get much cheaper, and now is a good time to start to grab the cheap rates in my view.

ASB hit 5.95% for a week in Feb, and have now increased their 5 year rate to 6.65%. I think the other banks will start to follow suit. Five year rates are roughly rising 1 basis point a day, of 1% every 100 days.

Think about that.

What are the Implications?

1. Borrowers:

I suggest you call your bank after the Thursday March the 12th OCR announcement, and consider locking in long rates AFTER your bank announces its reaction to the OCR drop. However if the OCR does not drop and NZ follows Aussie in this regard, - fix immediately long as rates may rise that day in those circumstances.

2. Deposit holders:

For those with fixed term deposits, short term rates will fall, long term will rise. You need to take a blend of long and short term deposit rates to remain flexible. Global banking may melt down again, you will want the higher rates if that happens, so don’t fix everything long as a deposit holder.

I have a consultant in the office who can give you a hand with it for free, if you want a hand making decisions. He is a broker for all banks and provides the service as complimentary. Go ahead and Email me for his contact.
Housing Recovery - Good News at Bottom End Of Housing

In case you have missed it, Australasian ‘low end residential’ property is recovering from a massive increase in new home buyers seeking bargains in a low interest environment.

Investors are also out in droves seeking bargains. I have numerous Real Estate agents telling me the lower to middle end is flat out again. Also, numerous mortgage brokers are telling me that applications for new loans are rapidly rising.

This despite the recession and doom and gloom.

Here’s some anecdotal feedback:-

1. Don Ha from Raywhyte in Manukau ( Auckland) told me yesterday he sold 66 properties in February - more than double last Feb’s result for him.

2. I have agents in North South and West Auckland telling me they are having the best months since mid 2007

3. I have similar feedback in Queenstown - multiple offers on houses inside $500k, with a listing shortage. ( Not to be confused with apartments in Queenstown which are crashing and entirely devalued.)

4. In South East Melbourne, my agent told me last Feb he sold 7 properties and this Feb he sold 35. One property he listed last week he expected to sell at $290k, and he got 9 offers on it in 2 days, with the first offer at $345k ! He says it’s as hot as 2007 around Frankston at present.

So it’s not all doom and gloom. A lot of money is made in recession and the low end is reaping rewards at present.

With cost of ownership roughly equal to cost of renting, - it makes sense.

One issue is while there are plenty of people wanting to buy - the banks are declining loans. Only the stronger can borrow at present.

So this is an Australasian wide, ‘bottom end’ residential recovery.

In NZ it’s driven by affordability gains from the crash in values and cost of borrowing.

In Aussie it’s driven by the same affordability factors but additionally stimulated by new home owner grants and big government spending on new housing.

Capital growth assets, apartments and leasehold assets are still crashed.

Quality commercial assets with great tenants are holding up, - marginal commercial asserts have crashed.
Global Banking - Read My Rave Below

I think we are going to see more banking failure this year and more pressure on big governments as the underwriters of failed institutions.

It will happen especially in the USA, but then this will flow on worldwide as the whole world has funded America ( being the reserve currency).

Therefore, if American institutions fail, the rest of the institutions lending come under huge pressure as they write off their losses.

A big spook on Wall St again, will push up interest rates globally - another reason to fix long and reduce risk.


Socialising the Losses

Of course the Western governments have decided to pick up the losses, - as letting the banks fail puts too much pressure on their economies. So the lesser of two evils it seems is ’socialising the losses’ and forcing the debts on the taxpayers.

Socialising the losses (making the masses pay for the titanic losses of failed banks) effectively means that the current working age population (and their children) are required to pay for the losses of the current banks and retiring baby boomers.

Rather than collapse the pension funds that invested in speculative and over valued assets like sub prime mortgages, and ruin baby boomers retirement, its ‘tax the workers time’. (I sound like a communist I know).

I think this is one of the biggest jack-ups of all times. The banks knew exactly what was going on - the credit bubble was paying Wall Street bank management massive bonuses and they let it run. The governments have failed taxpayers globally by not understanding it and allowing it to happen.

The affected taxpayers (of the debt ridden governments taking over the banks) now have to pay for the socialised losses through their taxes. In addition, eventually the cost of money will rise so the banks (owned by governments and private equity) can recoup their current losses.

So whether the losses are recovered through taxes, or high cost of funds over the long term - the burden comes on the next generation.

We (and our children) are going to have to pay for the poor decisions of bankers in the last decade. Does this mean that interest rates will be higher for the next decade? They must in my view - how else does it get paid off ? If the government won’t allow the banks to write off the debt for fear of depression, then the next generation has to pay off the losses through higher taxes, and higher interest rates.

It gets worse. To add insult to injury, - Wall Street banks have been paying out their bonuses for overseeing the biggest banking failure in history. There is only one word for it - they are a pack of ‘sods’ on Wall Street.

And that is putting it politely. Listen to this…One banker spent $1.2m refurbishing his bathroom, the month he applied for a bailout in October. One banker’s wife was quoted as economising, by choosing a cheaper fit out for the new corporate jet for the bank. An unbelievable disconnect from reality it seems has emerged in Wall St Banking management as to remuneration expectation and their worth.
Possibility of Hyperinflation

What happens when governments print money to pay their bills ? Their currency falls to be worthless, the banking system fails, and inflation becomes insane. Look at Zimbabwe and every other currency printer over time, except America.

America it seems, is allowed to pay its massive deficits with a printing machine. It does not have to pay its bills by borrowing the losses, or making goods and services to pay off its bills. It just prints cash.

Think about that.

The world is letting America print cash to pay its bills, without devaluing its currency and without inflation going wild. Watch this space - we could see the USD start to be heavily devalued and inflation go through the roof in the USA this year.

If this happens - its ‘game on’ in financial circles.

Interest rates will skyrocket globally, another reason to lock up long. And bad for exporters in NZ. Wine grower friends of mine should think about that.

Government Underwrites:  Can They Pay?

Another thing to think about is that the world is increasingly questioning various governments to make good on their underwrites for failed banking institutions and business. Especially in America where eventually the world must ask the question:

‘Why is America allowed to print money to pay its bills and not suffer hyper inflation?’

The whole concept of the Fiat Currency - governments ability to print cash that is not backed by gold or a tangible asset, is in question at present. What happens if we find that some Western governments are unable to meet obligations?

Last year one of Britain’s members of treasury gaffed, and admitted publicly that Britain’s banking system was 3 hours from total systemic failure, with ATMs shutting down due to illiquidity.

It was only due to last minute emergency meetings literally at 5pm on a Friday that the unthinkable was averted.

Do you remember Britain using anti-terror legislation to lock up $2b in funds on deposit from Iceland at the time? Yes - Iceland is known for its mad military and Islamic population and global role in terrorism - not!

That’s how bad it was - governments were not playing by the rules as they were all in deep trouble. Britain use a terrorist law against Iceland, because it was broke that day. To me this is unbelievable and only happened 130 days ago.

These days are not over - the issues are still there.

In my view, we will see more of these unprecedented events this year in 2009 as the world works through the current turmoil, which is far from over.

AIG was loosing USD$500k a minute according to CNBC over Oct 08 to Jan 09. Do the maths. That’s (USD$30m) an hour , $720m a day, $21b a month. That’s why they have asked for another $60b.

Good work boys ! You Wall St guys deserve another bonus (yeah right).

I do believe the stock market (which is crashing again this week) will continue to crash all year.

A friend of mine is a private banker friend in EFG Bank in Singapore. He believes (and last year predicted) the Dow will free fall to the mid 5000’s, - down from 13,000+ if it fell through 7250. His predictions are right on track as we speak with the Dow at 6850 and falling.

All stock exchanges are going to take a caning this year, - so expect doom and gloom.

Summary and Recommendations

Some of you reading this are investors (some large). Some of you are simply home owners. You may be wondering what the cheapest interest rate will be for you over 5 years.

I would suggest that you consider starting to grab fixed rates for long term money after the next OCR drop this Thursday. Why? Because the 5 year rates will rise from here on out in 2009.

Wait till your bank announces its reaction - to a rate drop in the OCR. Then fix.

If the rate does not drop, fix immediately (Thursday morning before 11am) because the market has priced in an expected OCR drop and rates may instantly rise if the OCR stays at the current rate. You will need to be quick if that happens as it just has in Aussie.

If you want a ‘dollar each way’ and believe floating rates will stay very low due to the recession, - you could consider a floating for half your debt at say 4-5% ( the emerging floating rates) and take 5 year rate for say 6- 6.5%. This means you lock in 50% of your money safely for 5 years and can see what happens over coming months to floating and long term rates. But consider against this that these are uncertain times offshore, and 6.5% is 20% under the 10 year average rate of circa 8% in NZ. Its cheap money, and you will sail through rough times enjoying the low rate if we see a harder landing off shore emerge this year.

To conclude, call you bank in the next 2 weeks as they announce their reaction to the OCR drop, and fix long. We are at or near the bottom of the interest rate cycles.

If you want a hand, send me an email & I will introduce you to my broker on the floor.

Thank you for reading this.

Matthew Gilligan
Director

Learn More about Matthew
Contact Matthew at mg@gra.co.nz or call +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

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