Education Bonds: Unlocking a New Future

Education Bonds offer a blend of tax advantages, flexible investment strategies, and wealth transfer capabilities that set them apart from their counterparts. Recent innovative product design means Education Bonds offer an enticing strategy that not only caters to education funding but also embraces diverse financial needs.

Education Bonds – The Basics

Let’s delve into the similarities between Education Bonds and their more familiar cousins, Investment Bonds. Just like their counterparts, Education bonds, are tax-advantaged investment products, built upon the foundation of investment-linked life insurance contracts. The key features they share include:

• the ability to invest as a lump sum or through regular savings plans,
• as tax-paid investments with a maximum rate of 30% (potentially lower for certain options due to certain deductions) they may benefit individuals on higher marginal tax rates,
• where investment bond-type withdrawals made from the earnings in the first 10 years, investment bond tax rules apply,
• the option to switch investment choices at any time, and
• the tax-free distribution of proceeds to beneficiaries in the event of the death of the last remaining life insured.

The Unique Structure of Education Bonds

Where Education Bonds truly shine is in their uniqueness. Designed specifically to tackle the mounting costs of education, these bonds offer a flexibility not found elsewhere. Not only can they accumulate funds for educational expenses, but they also provide the freedom to withdraw capital for non-education needs without triggering any tax events.

The magic lies in the design of Education Bonds. Education Bonds consist of two components: a capital component and an earnings component.

This structure allows for the withdrawal of capital from the Education Bond at any time, for any purpose, right from the very first day the Bond is opened. It’s a level of flexibility that surpasses traditional investment bonds and the confines of superannuation.

Valuable Education Tax Benefit

This design also unlocks a valuable tax benefit, allowing withdrawals for eligible education expenses to be met with an ‘Education Tax Benefit.’

Imagine this scenario: A withdrawal of $10,000 is made from the earnings component of an Education Bond to cover school fees. The Bond issuer pays an education tax benefit of $3,000 back into the Bond Owner’s account, effectively reducing the earnings component of the Bond by only $7,000.

When an education benefit is claimed, it becomes taxable income for the Education Beneficiary, not the Bond Owner, and is subject to their marginal tax rate. Importantly, where the funds invested in the education bond come from sources like a death benefit, estate of a deceased person (including a will, estate, or testamentary trust), or in the event of the bond owner’s death, minors, who are education beneficiaries can receive favourable tax treatment similar to that of adults. Depending on the beneficiary’s age and the source of the funds, the education benefit has the potential to be tax-free for the recipient.

Multiple Beneficiaries

Multiple beneficiaries? Not a problem! Recent innovations in Education Bonds, allow the appointment of multiple education beneficiaries under a single (family) bond, ensuring the Bond can provide for the educational needs of an entire family, whether they be your client’s own children, grandchildren, or even non-family members.

This means it is no longer necessary to set up an individual bond for each (grand)child within a family; beneficiaries can be added after establishing the Bond with ease, without resetting the 10-year rule. This means clients can avoid paying multiple fees on multiple bonds and the investment income earned in one bond can be optimised.

This legal structure, taxation and other features can favourably position the Bond as a tax-effective, low maintenance alternative to family, discretionary and testamentary trusts (created under your Will) in meeting your education funding objectives.

The ‘off-the-shelf’ simplicity of family bonds makes them ideal as against creating small trusts and they can be superior on tax, administrative efficiency and cost grounds.

Wealth Transfer with Bond Guardian Feature

Education Bonds go beyond being mere investment vehicles for education expenses. They offer an extra layer of estate planning benefits, providing a tax-effective means to pass on wealth. With ‘Will-like’ nomination features, you can designate beneficiaries to receive the bond benefits tax-free upon your passing. Furthermore, the option to appoint a Bond Guardian ensures that your wishes will be followed even in your absence, granting you peace of mind that your legacy will endure.

In today’s ever-evolving financial landscape, Education Bonds offer unique flexibility and tax efficiency. With an extensive menu of professionally managed investment options to choose from, these bonds allow you to align with your client’s investment philosophy and cater to their unique needs and preferences. It’s like having a tax-effective ‘Family Trust’ at your disposal, without the cumbersome compliance costs associated with traditional trust structures.

Whether your clients are focused on meeting their child’s education funding needs, planning for the future of their family, or seeking a robust and tax-effective investment strategy, Education Bonds offer a solution that goes beyond funding education costs alone. With greater flexibility and a broader range of benefits, Education Bonds may just be the answer.

Discover the exciting possibilities of Education Bonds and explore the incredible tax benefits they offer. For more information, speak to your Financial Adviser.

Education Bonds in Practice: Sole Grandparent, Looking to Financially Support Her Family

MEET HELLEN

Helen is in her golden years and wants to leave a $450,000 inheritance to help fund her three grandchildren’s education (and any further grandchildren) as a priority, as well as helping them towards a deposit on their first homes.

Helen’s Financial Adviser has calculated that for each of the current three grandchildren to attend private school would cost ~$280,000 each. Helen does not need income, but may like to access some of the investment for personal use without triggering a tax event. She wants the education funding to remain in place to meet the needs of her grandchildren when she passes away.

HELEN’S REQUIREMENTS

• Personal use: While Helen does need income, she may like to access some cash for personal use at any time, without triggering a tax event.
• Long-term planning: Should Helen pass away, she wants her two daughters, to oversee her intentions for her grandchildren’s education funding and future wealth transfer.

Education Bonds in Practice: Parents Looking to Save for the Future Cost of Education for the Family

MEET TIM AND LARA

Tim and Lara are both 38 years old and have two children aged 3, and 5, with plans for a third child in the next three years. They value education and see it as the doorway to their children’s future success in life. They want to send their children to Government Primary and Catholic secondary schools.

Tim has been offered the opportunity to fast-track his career by taking up a secondment in Vietnam – the family are planning to move in the next 12 months. Lara has returned to work and is also completing a masters degree part-time. Their average marginal tax rate is 45% and they have recently sold an investment property leaving $250,000 to invest.

They are seeking financial advice to create a plan to fund their children’s long-term education as they intend to return to Australia after the two-year secondment.

TIM & LARA’S REQUIREMENTS

• ~$130,000 per child: (Based on a child starting from year 7)
• They would like the option to continue with their education plan when they relocate overseas, including Lara’s study.

The case studies are simplified examples of an Education Bond might operate. Investment performance of Education Bonds is impacted by many factors, including economic conditions, investments markets, and importantly for your particularly Bond, the types of Investment Options selected by you. The taxation information in the case studies is current as at the date of this brochure and is based upon our general understanding of relevant Taxation Laws. As these laws and applicable tax rates may change over time, the Education Tax Benefit is not guaranteed. These changes can also impact the Tax-Free Thresholds, the marginal tax rates assumed in the examples and the application of benefits associated with Investment Bond Tax Rules. More information about the tax benefits is available on our website and in the Product Disclosure Statement (PDS). Speak to a taxation adviser or financial adviser if you are unsure and require advice. The ATO website can be accessed at ato.gov.au..