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Shane Ellis Senior Consulting Lawyer Your Legal Watchdog For Your Family Estate.

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Presentation on theme: "Shane Ellis Senior Consulting Lawyer Your Legal Watchdog For Your Family Estate."— Presentation transcript:

1 Shane Ellis Senior Consulting Lawyer Your Legal Watchdog For Your Family Estate

2 Shane Ellis is the Managing Director of SMSF LAW EQUITYPROTECT; and the SHANE ELLIS LEGAL GROUP. He is a Senior Consulting Lawyer specialising in SMSF ESTATES & LAW, FAMILY ESTATE PLANNING, Asset Protection Structuring & Firewalled Business Structures. He is one of few lawyers in Australia to hold SPAA ACCREDITED SMSF SPECIALIST ADVISOR status & ASIC RG 146 SPECIALIST SELF MANAGED SUPERANNUATION FUND ACCREDITATION. He has won Best of the Gold Coast Awards for three consecutive years for quality of legal services. He speaks regularly to business and professional groups on SMSF Estate Planning; Asset Protection & Business Structures & has written many articles for high profile publications. He is a regular speaker at the annual Morningstar SMSF Trustee Days. Shane is available to assist you on (B) (E) Shane would love to speak to your clients on these matters and assist you with the growth of your business. Liability Limited by a scheme approved under Professional Standards Legislation Legal Practitioners employed by Shane Ellis Senior Consulting Lawyer (including SMSF Law) are members of the scheme.

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4 AUSTRALIA TOPS GLOBAL WEALTH REPORT CREDIT SUISSE GLOBAL WEALTH REPORT 2013 – THE MEDIAN WEALTH PER AUSTRALIAN ADULT IS $219,500 THE HIGHEST IN THE WORLD

5 2013 TAKING JUDICIOUS AIM

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9 My judicious AIMs from attending this session are: 1. To have a better understanding of Related Party Loans & SMSFs 2. To have a better understanding of payment of Insurance proceeds from SMSFs 3. To have a better understanding of SMSF Estate Planning

10 “Estate Planning Realities”- Shane Ellis Your Logo Here

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12 YOUR SMSF DEED FROM

13  Setting up your estate correctly now, will very likely provide massive tax savings in the future. A proper Family Estate Protection Will (FEPW) with testamentary trusts allows minors to receive income from your estate at adult tax rates. Without this, they receive a base income of only $ From a TTW they can receive adult tax rates making the first E$20K of income tax free!  Proper estate planning for a Family Trust can mean “0” tax including Capital Gains Tax & no transfer stamp duty!  For SMSFs the tax office released a tax ruling in mid 2011 that created headlines in national newspapers announcing that death taxes were back. This ruling was finalised in 2013 confirming that proper planning for your SMSF estate is critical. MASSIVE TAX SAVINGS ARISE FROM CORRECT STRUCTURING NOW

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15 Q1. WHAT IS A SMSF DEED?

16 A. The document detailing the governing rules of the SMSF B. An annoying document lawyers & accountants charge too much for C. The title to the SMSF D. Something done by good Samaritans

17 Answer A A SMSF Deed specifies the governing rules for the SMSF. S52 SISA specifies covenants taken to be in the governing rules eg:  Trustees must act honestly;  Trustees duties must be performed in the best interests of the beneficiaries;  Keep assets separate from the Trustees assets;  Formulate an investment strategy & their ability to discharge liabilities also considering insurance. It needs to be up to date!!! All Deeds are different!!! SISA is a regulatory act. It says what CANNOT be done. YOUR SMSF DEED (subject to complying with the laws) SAYS WHAT CAN BE DONE!!!

18 S55 SISA – CONSEQUENCES OF CONTRAVENTION OF COVENANTS S55(1) A person must not contravene a covenant contained in governing rules of a superannuation entity S55(3) ACTION FOR LOSS OR DAMAGE- a person who suffers loss or damage as a result of another person’s contravention may recover the loss from that other person or any person involved in the contravention.

19 YOU, THE ADVISOR, ARE LIABLE REGARDLESS OF ANY BREACH OF CONTRACT OR OF ANY NEGLIGENCE

20 My judicious AIMs from attending this session are: 1. To have a better understanding of Related Party Loans & SMSFs

21 Q2. HOW MUCH CAN A PERSON PAY INTO THEIR SMSF?

22 A. 9% B. What my accountant tells me C. An amount up to the total of the concessional & non-concessional contributions caps D. As much as I want to

23 Answer D You can put as much as you want into your SMSF but it will have tax consequences.... But is there another way???

24 YOUR SMSF FT RPL MSF OR LOW OR “ZERO” TAX ENVIRONMENT!!!... & FOR EXTRA LEVERAGE SHARES YOU CHOOSE WHERE TO INVEST OR BUY MORE

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26 A SMSF Deed specifies the governing rules for the SMSF. It needs to be up to date. The SMSF Borrowing Laws changed significantly mid If your Deed is older it does not comply with the new SISA SS67A & B SMSFR2012/D1- You can now use the assets of the SMSF that are not subject to the LRB to fund improvements BUT you cannot change the character of the asset subject to the LRB e.g. Refurbishing the bathrooms is probably fine but bulldozing to build a unit block where the LRB is over a house will probably not comply.

27 NTLG Superannuation Technical minutes, June Limited recourse borrowing arrangements - related party loans Issues raised If a related party lender offers a discounted rate of interest to an SMSF under a section 67A borrowing arrangement, would the discount be considered a contribution received by the SMSF?

28 ATO initial response If a related party lender offers a discounted rate of interest to an SMSF under a section 67A borrowing arrangement, would the discount be considered a contribution received by the SMSF? If a related party lender offers a discounted rate of interest to an SMSF under a section 67A borrowing arrangement, would the discount be considered a contribution received by the SMSF? No. The absence of a requirement to pay interest on money loaned to the trustee does not increase the capital of the fund. A saving on an expense of an SMSF in the circumstances described is analogous to the circumstances outlined in examples 2 and 5 in Taxation Ruling TR 2010/1 Income tax: superannuation contributions. The purpose of a person in offering a low interest loan to an SMSF does not fall for consideration if there has been no increase in the capital of the fund. The outcome is different if, for example, interest incurred by the fund is paid by a third party, forgiven or reimbursed. In all of those circumstances the capital of the fund is increased as the interest liability has been met by a third party or forgiven or an amount has been reimbursed to the SMSF.

29 NTLG Superannuation Technical minutes, June Limited recourse borrowing arrangements - related party loans Issues raised Can an SMSF enter into a borrowing arrangement under section 67A of the Superannuation Industry (Supervision) Act 1993 (SISA) with a related party if a zero rate of interest is charged by the related party lender and only principal repayments, with no imputed interest, are made throughout the loan term in accordance with the loan agreement?

30 Note: The ATO initial response has been prepared on the basis that the arrangement is, in fact, a borrowing for the purposes of section 67A of the SISA Note: The ATO initial response has been prepared on the basis that the arrangement is, in fact, a borrowing for the purposes of section 67A of the SISA A borrowingis an arrangement for the payment of an amount of money A borrowing, for the purposes of section 67A of the SISA, is an arrangement for the payment of an amount of money from one party to another where the parties intend that it will subsequently be repaid to the lender. Although a borrowing arrangement will commonly involve an interest charge, the absence of interest will not, of itself, preclude an arrangement from being a borrowing. To determine whether a related party transaction does, in fact, amount to a borrowing, the ATO will consider any documentary evidence that is available together with any other evidence, for example whether any repayments of the amount borrowed are made. Further information is available in SMSFR 2009/2 on the ATO's view of the meaning of a borrowing in the relevant context. It should also be noted that Taxation Ruling TR 2010/1 Income tax: superannuation contributions explains the circumstances in which the forgiveness of a loan may constitute a contribution by the lender to a superannuation fund.

31 Hmmm, what about the NALI provisions???

32 NALI PROVISIONS LIMB A- INCOME FROM A NON-ARMS LENGTH SCHEME LIMB B- INCOME IS MORE THAN MIGHT HAVE BEEN IF DEALING AT ARMS LENGTH A related party loan is non-arms length Usually “income” is the same not more when investing in a single acquirable asset under LRBA eg. Commercial rent or share dividend. There is a saving on an expense because of NIL interest rate ATO DEFINITIONS Income The amount of money earned from personal exertion and investments. Expense Money spent PBR PBR –ATO concluded NIL interest related party LRBA not NALI

33 My judicious AIMs from attending this session are: 2. To have a better understanding of payment of Insurance proceeds from SMSFs

34 Q3. HOW MANY ACCUMULATION ACCOUNTS CAN A MEMBER OF A SMSF HAVE IN THAT PARTICULAR SMSF?

35 A. None B. As many as is required to segregate assets C. One D. It depends on what the SMSF Deed says

36 Answer C ONE Regulated by SISR Pt 7. Contributions must be allocated to members accounts within 28 days after end of month they are received.

37 Q4. HOW MANY PENSION ACCOUNTS CAN A MEMBER OF A SMSF HAVE IN THAT PARTICULAR SMSF?

38 A. None B. As many as is required with segregation of capital C. One D. It depends on what the SMSF Deed says

39 Answer B AS MANY AS IS REQUIRED WITH SEGREGATION OF CAPITAL Regulated by SISR R1.05(11A) & 1.06(9A) with capital not to be added to by contribution or roll over & meet minimum payment rules

40 Q5. IF MY SMSF ALLOWS THE TRUSTEE TO HOLD POLICIES OF INSURANCE FOR MEMBERS WHERE DO THE PROCEEDS HAVE TO BE PAID ON THE DEATH OF A MEMBER?

41 A. Out of the SMSF as a Member’s death benefit B. To the Advisors to settle their long overdue accounts C. In accordance with the terms of the SMSF Deed & the Investment Strategy D. To me because I couldn’t find either a Legal Personal Representative or a Dependant of the deceased

42 Answer C A SMSF Deed specifies the governing rules for the SMSF. It needs to be up to date. It needs to be coupled with a written Investment Strategy which also considers Insurance for the members and is reviewed regularly. - SISR R4.09 These regulations implement a number of Stronger Super Review measures and will broadly require SMSF trustees to: Consider insurance for members as part of the fund’s investment strategy; Regularly review their investment strategy; Keep money and assets of the fund separate from those held by a trustee; and Value assets at market value for reporting purposes – for FY2012/13 and future years. The regulations commenced on 7 August 2012, so they will have an immediate impact on SMSF trustees and any advice provided to them.

43 Investment earnings do not include proceeds from an insurance policy paid after the pensioner's death or an amount arising from self-insurance. Neither do they include amounts credited to the member's account from anti-detriment payments. SISR 1.06(1)(a)(ii)

44 7.7 Allocation of insurance proceeds to member accounts- NTLGA DEC 2012 Assuming a self managed super fund's trust deed contained provisions which allowed trustee to: effect and hold policies of insurance on behalf of members offer members the choice of an individual investment strategy and to adopt segregated investment pools for each member include in the calculation of a member's benefit the proceeds of an insurance policy received on the death of another member of the fund SMSF

45 NTLGA DEC Question 1 posed to ATO >>> Could the trustee of the fund hold a policy of insurance over the life of one member of the fund (Member A) but for the policy to be included in an investment strategy adopted for another member (Member B) and held in a segregated asset pool for Member B? Member A Member B SMSF TRUSTEE HOLDS LIFE POLICY OVER LIFE OF DAD ATO RESPONSE The Superannuation Industry (Supervision) Act 1993 (SIS Act) and Superannuation Industry (Supervision) Regulations 1993 (SIS Regulations) do not prevent a policy of insurance over the life of one member (Member A) of an SMSF being included in an investment strategy adopted for another member (Member B) of the SMSF and held in a segregated asset pool for Member B. Trustees should ensure that such a strategy is consistent with the terms of the TRUST DEED and the investment strategy formulated by the trustees. SMSF TRUSTEE HOLDS LIFE POLICY IN MUM’S SEGREGATED ASSET POOL PER INVESTMENT STRATEGY

46 NTLGA DEC 2012 – next question posed to ATO >>> – In relation to Question 1 - assuming all the premiums in respect of the policy over Member A's life were deducted from the segregated asset pool held for Member B, could any insurance proceeds received by the trustee in respect of the death of Member A be allocated exclusively to the segregated asset pool held for Member B and be included in the calculation of member B's benefit in the fund? Member B SMSF TRUSTEE PAYS FOR LIFE POLICY FROM MUM’S SEGREGATED ASSET POOL PER INVESTMENT STRATEGY LIFE INS Member A LIFE POLICY PROCEEDS RECEIVED BY SMSF TRUSTEE ALLOCATED EXCLUSIVELY MEMBER B 0 LIFE INS Member A Member B ATO RESPONSE As advised at the June 2012 meeting of this sub-group (item 7.3), where the SMSF trustee has determined that all the premiums for a life insurance policy over a particular member's life (Member A's life) are to be charged against another member's benefits (Member B's benefits) in the fund, it would appear consistent with the 'fair and reasonable' principles included in SIS regulations 5.02 and 5.03 that the full amount of any proceeds received under the insurance policy be credited to Member B's account (or entitlement) provided that crediting is also within the terms of the trust deed.

47 NTLGA DEC 2012 – next question posed to ATO >>> – Can the ATO confirm that where the insurance proceeds are then promptly credited to Member B's account that they would be treated the same as the allocation of investment income and not be deemed to be an allocation from a reserve? ATO RESPONSE The meaning of the term 'reserve' for the purposes of subregulation (4) of Income Tax Assessment Regulations 1997 (ITAR 1997) was discussed at the June 2012 meeting of this sub-group. At that meeting it was noted that a broad meaning of the term 'reserve' in that context is required to maintain the integrity of the contributions caps. However, we agree that the crediting of the proceeds of an insurance policy is not of itself a special case. That is, in circumstances where crediting investment income from other sources would not result in an allocation from a reserve for the purposes of the excess contributions tax provisions, the same result in relation to crediting insurance proceeds would be expected.

48 LEGAL CHERRY PICKING>>> A MEMBER IS ABLE TO HAVE MULTIPLE PENSION ACCOUNTS NO DOUBT AS WISE ADVISORS ONE OF THOSE WOULD HAVE NO TAXABLE COMPONENT ie. TOTALLY MADE UP OF NON-CONCESSIONAL CONTRIBUTIONS THE INSURANCE PROCEEDS PAID INTO A MEMBER’S ACCOUNT ADOPT THE TAXABLE/TAX FREE COMPONENTS OF THE ACCOUNT THEY ARE PAID INTO. HMMM... IF THE SMSF DEED & THE INVESTMENT STRATEGY NOMINATED THAT THE TRUSTEE MAY CHOOSE THE MEMBER’S ACCOUNT TO WHICH THE LIFE INSURANCE IS TO BE PAID ON THE DEATH OF A MEMBER WOULD THE TRUSTEE NO DOUBT CHOOSE THE PENSION ACCOUNT WITH THE >>> “0” TAXABLE COMPONENT!!!

49 My judicious AIMs from attending this session are: 3. To have a better understanding of SMSF Estate Planning

50 Q6. DOES HAVING A CORPORATE TRUSTEE FOR MY SMSF GIVE ME PERSONAL ASSET PROTECTION?

51 A. Yes, of course it does, everyone says that. B. It depends on the SMSF Deed. C. Er, Not in all cases. D. No, the “Members as Trustees” wins hands down every time, because it’s cheaper.

52 Answer C- Er, Not in all cases WOOSTER –V- MORRIS SUPREME COURT VICTORIA JUDGEMENT- 1 ST NOV 2013

53 WOOSTER –V- MORRIS SUPREME COURT VICTORIA JUDGEMENT 1 ST NOV 2013 Blended Family!!! SMSF established by Deed - 24 th AUG 2005 Trustees & members = Mr Morris and Mrs Morris (his 2 nd wife) Mr Morris died 27 th FEB 2010 OCT nd wife brought her son in as second Trustee Deceased had E$900K in his pension account Deceased had made a BDBN in favour of his daughters from first marriage to exclusion of his 2 nd wife 11 th MAY nd wife took legal advice and was advised deceased member’s BDBN was not valid as deceased had not complied with requirements in SMSF Deed 16 th AUG nd wife took legal advice and was advised deceased member’s death benefits could be paid to herself within the fund as a pension 18 th AUG Corporate Trustee appointed- UPPER SWAN NOMINEES P/L. 2 nd wife sole Director. 2 nd wife & her son resigned as Trustees. Trustee company accepted legal advice that BDBN not binding. Death benefits paid to 2 nd wife as a pension. Dispute over a BDBN Plaintiffs = Deceased member’s daughters from first marriage Defendants = 2nd wife of Deceased (a Trustee & Member of the SMSF), her son as one of the Trustees of the SMSF, and new SMSF Corporate Trustee - UPPER SWAN NOMINEES P/L

54 WOOSTER –V- MORRIS SUPREME COURT VICTORIA JUDGEMENT 1 ST NOV 2013>>> BDBN BDBN was binding on Trustees of SMSF namely 2 nd wife & her son until 18 th AUG 2011, & then on the Company Trustee WHO PAYS THE JUDGEMENT??? Justice McMillan>>> “Cl 3.4 of the [SMSF] Deed provides any member, dependant or beneficiary has an interest in the trust fund of the [SMSF] as a whole, not in any particular part of the fund. In any event the deceased’s account was transferred into 2 nd wife’s account & it is not now appropriate to try to pry the two accounts apart.” “The orders [Judgement & Costs] made against the [SMSF] should come out of the fund as a whole not just the interests of the deceased. This outcome best reflects the terms of the [SMSF] Deed and the way the [SMSF] has been managed.”

55 WOOSTER –V- MORRIS SUPREME COURT VICTORIA ON THE ? OF INDEMNITY BY SMSF FOR THE TRUSTEES Justice McMillan>>> “There is no doubt the defendants had a right of indemnity out of the [SMSF]... According to the general law and [SMSF] Deed.” “There are two decisions made by [2 nd wife] that given that she did not seek the advice of the court amount to her breach of her obligations to the [SMSF]; 1. Deciding the BDBN was not binding, &, 2. Deciding to defend these proceedings. In making both decisions she failed to act impartially, putting her interests ahead of the other beneficiaries of the [SMSF]. She should have recognised her conflict of interest and sought the advice of the Court before making either decision.” “If [2 nd wife] and the company Trustee were permitted to claim an indemnity, the costs of the wrong headed defence will be borne by the [SMSF]. Instead, the defendants should pay the costs consequent upon the decision to defend the proceeding”.

56 WOOSTER –V- MORRIS SUPREME COURT VICTORIA COSTS ORDERS- Against company Trustee & against 2 nd wife personally!!! Justice McMillan>>> “In my view the existence of the corporate Trustee should not protect [2 nd wife]”.... “There is no reason why the presence of a corporate veil should preclude a costs order against a controlling Director who stands to benefit from the proceedings.” “The paramount duty of a Trustee is to exercise its power in the best interests of the present and future beneficiaries of the trust holding the scales impartially between the different classes of beneficiaries. In my view [2 nd wife’s] substantial financial interest in the outcome and the lack of concern for the other beneficiaries in making the decision to defend the proceedings mean it is unfair that if UPPER SWAN is unable to pay all the costs award made against it, it should fall upon [2 nd wife] in her personal capacity to meet any shortfall.”

57 OUCH!!!

58 ....and the moral of the story is>>>

59 MSF ESTATE PLANNING !!!!HAVE PROPER!!!!

60 4 Options available for SMSF Estate on your death 1. SMSF Trustee may pay lump sum to a dependant or your Legal Estate 2. SMSF Trustee may pay pension to a tax dependant 3. Reversionary Pension 4. Insurance benefits may increase deceased member’s account or taken into a reserve

61 S55(1)-SIS Act a Trustee must not contravene a rule in the trust deed or other governing rules of the fund.

62 YOUR TRUST DEED -V- SMSF LAW SMSF DEED

63 No Nomination

64 NON BINDING WISHES KATZ CASE SMITE THE CAT NEXT DOOR

65 BINDING NOMINATIONS DONOVAN’S CASE THE MAGIC MISSED THE MARK

66 DEATH BENEFIT RULE PART OF RULES OF FUND & BINDS TRUSTEES MSF STRATEGIES

67 MSF WILL SMSF LAW SMSF DEED RIGHT

68 Your Death Benefits-> Protected by SMSF Will

69 MSF AUTOREVERSIONARYPENSIONS

70 Draft ruling TR2011/D3 WAS FINALISED ON 31 st July 2013 IN TR2013/5 & states that pension exemptions cease upon the death of a member UNLESS the pension is specifically auto-reversionary. (“ARP”) A SMSF Deed specifies the governing rules for the SMSF. It needs to be up to date and allow for auto-reversionary pensions. THIS HAS HUGE IMPLICATIONS WITH SMSF ESTATE PLANNING!!! THE PENSION MUST SPECIFICALLY STATE IT IS AN ARP. Failure to comply with pension rules will cause a pension to cease; as will exhaustion of capital; commutation; & death UNLESS THE PENSION IS an ARP!!! TR2013/5 is in fairly plain english. Please choose to read it.

71 BDBN 100% TO MY WIFE BDBN 100% TO MY HUSBAND BUT WHAT DID THE SMSF DEED SAY???

72 DEPENDANTS - S ITAA 1997 Spouse incl. same sex Ex- spouse Kids up to 25 years If financially dependant Otherwise 18 years Disabled Child Interdependency Financial Dependants Eg Malik & Faulls cases

73 Malik’s Case Faull’s Case Noel-v-Cook APRA Guideline No.I.C.2 stipulates: “There is no need for one person to be wholly dependent upon another for that person to be a ‘dependant’ for the purposes of the payment standards. Financial dependency can be established where a person relies wholly or in part on another for his or her means of subsistence. Nor must the recipient show a need for the money received from the deceased member in order to qualify as a dependant. Moreover, since partial financial dependency can generally be sufficient to establish a relationship of dependence, it is possible for two persons to be dependent on each other for the purposes of the payment standards.”

74 SMITE THE CAT NEXT DOOR Dependency Declaration

75 PROCRASTINATION (I’ll find a picture for you later)

76 Procrastination is unfortunately not just the thief of time but also the robber of family wealth when the unexpected arrives for the unprepared! Shane Ellis

77 “Estate Planning Realities”- Shane Ellis Your Logo Here

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79 Q7. CAN YOUR WILL COVER YOUR WHOLE ESTATE?

80 A. Ooops, I don’t have a current Will B. Of course, have a look at mine C. Er, no! D. Only if a blue moon occurs in the same month the Will is created

81 Answer C And this is the reason why >>>

82 ESTATE PLANNING FOR YOUR FAMILY’S PROTECTION IS A 4 STEP APPROACH

83 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX COMPANIES TRUSTS SURVIVORSHIP CONTROL INSURANCE NOMINATED BENEFICIARIES MSF TESTAMENTARY TRUST DEPENDANTS

84 TTW EPAs GUARDIANS FT SMSF WILL A R PENSIONS TRUSTS COMPANIES MSF ASSETS & LIFE INSURANCE FEPP WORKS VIA STRUCTURES COMPLIMENTING EACH OTHER

85 My judicious AIMs from attending this session are: 1. To have a better understanding of Related Party Loans & SMSFs 2. To have a better understanding of payment of Insurance proceeds from SMSFs 3. To have a better understanding of SMSF Estate Planning

86 RITE ACT NOW ! Reduce Taxes Protect your assets Ensure your Legacy goes where you want it to go! SMSF Estate Protection

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88 A REVIEW OF YOUR PERSONAL ESTATE STRUCTURES 30 % DISCOUNT ON YOUR PERSONAL ESTATE UPGRADE 10% REFERRAL FEE ON CLIENTS REFERRED

89 RITE ACT NOW! Reduce Taxes Ensure your Legacy goes where you want it to go! SMSF Estate Protection CALL NOW or Protect your assets


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