Many in retirement are travelling comfortably, with three key factors contributing to their happiness – good physical and mental health and enough money to enjoy life.
Perhaps the assumption that markets are still anchored by predictable economic policies needs to be challenged. For the first time since the fall of the Berlin Wall, political volatility – once background noise – is potentially reshaping investment risk at a structural level.
Funeral bonds offer peace of mind – and potential social security benefits
There’s no questioning the peace of mind a funeral bond, a specialist investment exclusively catering for funeral expenses, can provide – the importance to investors of knowing that their final wishes will be honoured while easing the financial and emotional burden on loved ones at a difficult time.
Critical as that is, it should never be overlooked that these bonds can also have an important financial role to play during the lifetime of the investor as they come with significant social security considerations that have the potential to help them qualify for, or increase, their means-tested government entitlements.
Under the rules of Centrelink and the Department of Veterans’ Affairs (DVA), up to $15,500 – this limit is indexed annually – can be invested in a funeral bond and will be exempt from its assets and income tests. For couples, this effectively doubles to $31,000 if each person invests in a separate funeral bond.
What this simply means is that the value of the funeral bond is not included in an investor’s total assessable assets when determining their eligibility for a pension.
This can provide significant social security benefits for funeral bonds – a structured way to pre-plan funeral costs – and help explain why they have become an essential financial planning tool for families and their advisers, whether they be funeral directors or financial planners.
For the former, it allows them to support their communities by helping clients plan, ensuring families are prepared while strengthening their business through long-term client relationships.
For the latter, they can guide clients on how funeral bonds fit into broader financial and estate planning needs, including potential social security entitlements and the advantages of having tax-paid investment status.
What are funeral bonds? They are specialised investments providing a secure way for individuals to set aside funds exclusively for funeral expenses. Typically, they have no age or health restrictions, making them accessible to a broad range of individuals.
Additionally, if the funeral bond proceeds exceed the funeral costs, the remaining funds may become part of the investor’s estate – depending on the ownership structure of the bond.
Funeral bond benefits: For families, they protect loved ones from unexpected financial stress at a difficult time. This can be especially beneficial for families lacking the resources to pay for a funeral service while the details of the will and estate are being finalised.
In essence, they allow individuals to take control of their own funeral planning, thereby reducing uncertainty and stress for their families. By securing a funeral bond, investors can plan funeral details in advance, make personal choices and ease the decision-making burden on their family.
Funeral bond ownership structures:
Unassigned: Allow individuals to invest directly or via a financial adviser. Best suited to those who don’t have a formal arrangement with a funeral director but wish to set aside funds to contribute to their funeral expenses. The investor retains full ownership of the bond.
Assigned: Used to prepay a funeral, it is an arrangement where ownership of the bond is transferred to a funeral provider. By doing so, the investor locks in the price of the funeral.
Nominate a funeral director: This option allows investors to choose a preferred funeral director while retaining ownership of the bond. It indicates an intention to an investor’s loved ones but does not lock either party into a formal contract.
How funeral bonds work in estate planning: Funeral bonds play an important role in estate planning as they ensure funds set aside for a funeral remain separate from broader estate distribution processes, helping to avoid delays, disputes or unexpected financial burdens for the family.
Unlike many other investments, earnings on a funeral bond are taxed within the bond itself at a maximum 30 per cent and paid by the provider – meaning the investor does not need to report investment returns on their personal tax return. This tax treatment ensures that funds grow in a structured and tax-paid environment, offering additional predictability for estate planning.
Implications for funeral directors:
In the case of an assigned funeral bond, the funeral director assumes control over the investment and its earnings. This means:
– The provider manages the tax obligations of the investment earnings.
– The funeral director benefits from any growth in the bond.
– The family has no claim over any excess funds once the funeral bond is assigned.
Considerations for financial advisers:
For advisers, integrating funeral bonds into estate plans can add value by offering clients a structured and tax-effective way to manage funeral expenses. Additionally, clients may benefit from certain Centrelink and DVA exemptions and tax advantages. Advisers should be mindful of the regulatory requirements surrounding tax-related discussions and refer to the Tax Practitioners Board guidelines where necessary.
Claiming a funeral bond: It requires submitting several documents that may include a certified copy of the medical cause of death certificate; invoice from the funeral provider; the deceased’s will; and a completed claim form indicating how and where the proceeds are to be paid.
Limitations of funeral bonds: They cannot be accessed during the investor’s lifetime, with the funeral bond only maturing on death. In addition, the provider must be notified of the investor’s death before a claim can be made. If family members or executors are unaware of the policy, it may remain unclaimed and eventually be transferred to unclaimed funds. And, depending on the provider, different investment options may be available, each with varying levels of risk and return.
Funeral bonds offer a structured and effective way to set aside funds for funeral costs, providing peace of mind by ensuring funeral expenses are covered and reducing financial and emotional stress for families during a time of grief. They may also offer financial security by helping investors qualify for or maximise their social security entitlements.
