Precaution of leaving bequests in KiwiSaver can have fish hooks.
Do you want to go to the grave knowing your hard-earned savings won't be wasted? Would you like to ensure little Holly or Olly can use the money only to buy a home?
Feckless children and grandchildren are a worry for parents who have worked hard to build up a nest egg. We'd like the recipients to treat the money with respect. But some will pour it into fast cars, boats, travel, eating out, ill-chosen partners or even the pokies.
If you're leaving only a smallish sum of money, then why not direct for it to be paid into the beneficiary's KiwiSaver account? That way they're forced to use it to buy a first home.
It's a good idea on the surface and will work for many families. But it has a whole host of fish hooks that need to be thought through. For some people it may end up better to set up a trust or to simply leave cash and let the beneficiaries decide what to do.
The most obvious benefit of leaving money into a KiwiSaver account is the beneficiaries don't get their hands on a lot of cash at a young age. It must be used for a good purpose, such as buying a first home or retiring. It will also be invested sensibly, although hopefully not in a conservative fund if they are young.
But as Binu Paul of SavvyKiwi points out, paying into KiwiSaver can have negatives as well as positives. "If the grandkids are sitting on a pretty high mortgage paying a hefty interest liability then it might in fact be better to help pay off their debt first."
Leaving money via a will into KiwiSaver costs less than setting up a trust. If you have a few thousand or even $20,000 or $30,000 to leave to each child or grandchild, this might be cost-effective.
One catch often noted is that KiwiSaver is a political football and a Government could change the rules at any time. If that happens, it might not be possible for the beneficiaries to use their inheritance to buy a house. Trying to anticipate future political and demographic pressures is speculation at best, says Paul.
At the moment it looks safe. In fact the Government has a bill in Parliament to extend the rules for first-home buyers so they can withdraw their member tax credits.
The way around the problem of potential rule changes, says David Ireland, a partner at law firm Kensington Swan, is to change your will if that happens.
The cynic in me thinks someone who hasn't really worked for their KiwiSaver payout (and some of those who have) will blow it Lotto-style when they retire and still end up poor.
I also think that some feckless offspring will still find a way to live it up on their inheritance even if it's locked up in KiwiSaver. The beneficiary may think "my retirement is sorted thanks to gramps so I can spend all my salary". On the flip side, says Paul, they might end up having a better quality of life as a result.
KiwiSaver is a bit of a blunt instrument for bequests and may not be fair for all beneficiaries. For example, a beneficiary who has emigrated cannot access KiwiSaver for a first house in another country and will have to wait until retirement for the money.
For someone else, paying off a student loan may be more important for his or her financial future than providing for a first home. Leaving the money as a lump sum so the child could set up a business may be just as beneficial as putting it into KiwiSaver.
Grandparents may not always know the ins and outs of their grandchildren's financial situation, says Paul. "But on the assumption that the grandkids don't have a better use of the money, leaving it in KiwiSaver has benefits."
A bigger worry is that the money isn't protected from the spouse, business creditors or the Official Assignee.
Inheritances are not automatically relationship property, says Ireland. They become relationship property if the money is intermingled, which happens over time with KiwiSaver.
Realistically, it becomes difficult to carve off an inheritance once it's deposited in the KiwiSaver pot and investment returns and tax credits are added to it.
"It quickly [loses] its character as separate property," he says.
Even if you could prove that a bequest was separate property, it automatically becomes relationship property if it is withdrawn to buy a house for both spouses. On the other hand, if the money had been left to a trust and it was lent to the couple to buy a house it still belongs to the trust.
The way around this, says Ireland, is to have a "Section 21" agreement signed by the couple in which they contract out of the Relationship (Property) Act.
If it's in KiwiSaver then the money is exposed. It's fair game for business creditors who want payment, and/or for the Official Assignee if you've filed for bankruptcy. Ireland points out that business creditors and the Official Assignee may have to wait until you're 65 before they can get the money, but they're still entitled to it.
Leaving money to a beneficiary's KiwiSaver account doesn't protect it from Family Court disputes, says Ireland. A disgruntled family member could stop the money being deposited into KiwiSaver while a dispute was pending. If the money had already been deposited, a member of the family could access it potentially, but it would be a more complicated and expensive process, adds Ireland.
John McFetridge, personal client services director at Perpetual Guardian, says the issue of leaving money to beneficiaries' KiwiSaver accounts is new.
Where possible McFetridge would recommend setting up a trust. This gives you the greatest control of your money beyond the grave. You need a reasonable sum of money to make this worthwhile because it costs $900 to $1000 to set the trust up and 0.5 per cent a year of the money in the trust to administer it. There may be other costs associated with making withdrawals.
Another option, says McFetridge, is to have a well-crafted will that leaves money directly to the grandchildren or other beneficiaries with a wish that the inheritance be deposited into KiwiSaver, used for the purchase of a home or for repaying a mortgage or other debt.
But a will that is too prescriptive could make administration of the estate impossible, resulting in partial intestacy. The money might never get to its intended recipient if that happens.
A third possibility is to leave the money in a testamentary trust created when you die to the grandchildren. It could be administered by your children who are the trustees.
If grandparents or parents want money to go into a KiwiSaver account they could always make a regular payment, rather than wait until death. This would help the recipient receive their full member tax credit from the Government if they aren't already and would mean that the KiwiSaver pot would grow over time. Voluntary payments are treated the same by the Inland Revenue Department whether they're made by the owner of the KiwiSaver account or by someone else, says Joanna Doolan, tax partner at Ernst & Young. Provided, that is, that the person giving the money isn't also the individual's employer.
All in all, leaving money via KiwiSaver will work for some families. It's cheap and relatively straightforward. But beware that it could make some of the recipients a little unhappy if they feel they can't get their hands on the cash.