A Yield Client Case Study
High Income Earner
High Net Worth
High Income Earner
High Net Worth
About The Client
Our clients were a high income, high net worth couple with multiple entities including companies and trusts. The wife is a specialist doctor while the husband was a lawyer who had since shifted his focus to managing his wife’s highly successful business. In addition to their busy work life, they were also a small family with two young children.
The couple owned their primary residence outright, had several investment properties, a large investment in shares with a few superannuation funds. Whilst they also had a significant amount of debt, that debt accounted for less than 30% of their overall assets and their income could easily service it.
Why They Sought Advice
Although the couple was in a very strong financial position, they still had an array of goals that they wanted to achieve, but due to their busy lifestyle, they had never really taken the time to determine whether said goals were achievable. Further to this, they also hadn’t completely considered the risk in their situation including how they own their assets, how their money is invested and what would happen if either of them were no longer able to earn an income.
The following is a brief outline of their goals which laid the foundation for why they sought our advice and what their financial plan would address:
- For us to map out their current situation using our scenario analysis calculations to understand how their financial position was currently tracking;
- Determine an appropriate way they can utilise their cash flow, capital, and evaluate their capacity to gear;
- Determine when they could retire with their desired retirement income, which would ideally have them retire by age 60;
- Send their kids to private schools;
- Provide a large lump sum to assist both children once they have matured into adulthood;
- Identify whether they could lead their desired lifestyle whilst working which involves going on overseas holidays & the regular purchase of new vehicles;
- Consolidate their superannuation, including a review of what can be done with the husband’s defined benefit funds; and
- Protecting their risk in the event they could produce an income and ensure they are able to leave both their kids a substantial lump sum if they were to both pass away or become totally permanently disabled.
Our first piece of advice was to amend the directors/trustees of some of their entities & the owners of some of their assets, as being a specialist doctor, the wife was at risk should any of her patients instigate civil litigation. As several of these assets were held in the Wife’s name, or with her being the director of some of these entities holding said investments, we considered these to be at risk.
Next, we considered their investment properties in the context of who owns them, how their ownership is structured and how that benefits their position, along with how they’ve performed compared to the median of their respective suburbs. Whilst two of the properties appeared to have performed reasonably well, another two had achieved no capital growth in over four years, which was concerning as property growth had run rampant across the state during that same time. We were also concerned that one of the properties was in the name of the wife.
It was our recommendation that they consider selling the underperforming assets so that they could free up cashflow & capital to direct towards other property investing, namely the purchase of the wife’s business premises (which is discussed more later) and another new investment property in their family trust. Part of this involved utilising the services of a buyer’s advocate to determine an appropriate alternative investment property.
We then advised them to borrow funds from one of their deductible property loans and purchase a diversified portfolio of managed investments. We offered varying options on the types of investments they could purchase, however, one of the objectives here was to negatively gear, freeing up the ability to distribute trust income to the husband, whilst spreading risk across varying asset classes targeting long-term capital growth.
From here we provided advice to consolidate their super funds into a cost-effective product that would be able to meet their ongoing needs & invest in a portfolio of diversified asset classes suitable to their investment risk profiles. Unfortunately, the husband’s defined benefit was one that required him to retain it until he is old enough to access it, forcing us to recommend it remain where it is. This is unfortunate as it will now only grow by the equivalent of inflation each year, making it a really poor long term investment. In addition, we also recommended that they both maximize their deductible super contributions, as they had the capacity to do so and it is a highly tax-effective strategy for saving towards retirement, despite the wife incurring additional tax due to earning above the high-income threshold.
We also wanted to consider the purchase of the wife’s business premises. Our advice was to do this sooner rather than later, as to ensure they lock in pricing they are comfortable with and providing security for her business. Whilst it was our preference to do this within a Self-Managed Super Fund (SMSF), they lacked sufficient funds within the super environment to do so. Instead, we recommended they purchase within their family trust now and in five years, when their balance becomes sufficient enough, they purchase it from the family trust using an SMSF. Whilst doing this would incur two sets of costs, it was our opinion that the benefits of doing so outweighed the additional costs involved.
We next recommended that they continue to distribute income in line with their accountant’s advice, which was to distribute to the husband up to the cap of the 32.5% tax bracket and then remaining income into a company for investment purposes. This second company is then used for investment purposes and in doing so caps their tax at 30%. Whilst the company doesn’t attract the CGT discount for owning an asset for longer than a year, the benefits of generating franking credits, which can then be used in future years to offset tax on dividend payments, is a very tax-effective option for high-income earners to invest for their future.
If they proceeded with the above advice, we anticipated they would be left with no personal debt. As such, from that point, we’d recommended they continue to contribute surplus cash they have available into their family trust to be used for additional diversified investment.
Amongst all of these points of advice, we overlaid their other goals of gifting to their children, purchasing new vehicles and going on overseas holidays. Prior to our advice, we anticipated they could retire by age 63 at the earliest or 67 at the latest, dependent on how much they decided to gift their children. After implementing our advice, we anticipated they could retire by age 58 at the earliest and age 62 at the latest, again these ages are dependent on how much they gift their children, therefore our advice represented an improvement of retiring 5 years earlier.
No financial plan is complete without ensuring the risk to the plan is adequately covered. As they do have several costly goals, our calculations suggested they would not be able to achieve these goals if something happened to the wife and she could no longer produce an income. As such, we reviewed appropriate levels of life, disability, trauma & income protection covers & recommended a product that was cost-effective and provided value for money.
Finally, we provided various points we believe they should discuss with their solicitor in order to ensure their estate is distributed in line with their wishes, or that they are able to make financial or medical decisions on behalf of each other should the other be unable to do so.
The Benefits Of Our Advice
By seeking & implementing our advice our clients were set to receive the following benefits:
- Shifting the ownership of their various entities and assets allowed for greater security against the risk of civil litigation;
- Selling their underperforming properties in favour of alternative properties owned under differing structures and investing into a diversified portfolio of managed funds positioned the couple to be in a more risk-averse position going into the future and prioritises longer-term capital growth;
- Maximising deductible contributions to super ensured that funds are being consolidated into the superannuation environment where earnings are taxed more effectively;
- Distributing income in line with their accountant’s advice and considerate of our thoughts, ensured that surplus cashflows are allocated in the most tax-effective manner. In addition, the use of a company as an investment vehicle provided the next best alternative to funds within super through the use of franking credits on dividends paid;
- They now had a greater understanding of their position going forward and how they are tracking towards retirement, giving them peace of mind moving forward;
- Applying for the recommended insurance and associated level of cover ensured that they would remain adequately protected in the event of death or total permanent disability; and
- Purchasing the business premises locked in a price they would be happy to pay and provided certainty for their business. In addition, it also ensured that the property is available should they decided to purchase it through their SMSF in the future.