My Plan

May 2017 5 Minutes

Super and estate planning

In anticipation of the changes to super from 1 July 2017, estate planning strategies need to be revisited

Prior to 1 July 2017, spouses receiving death benefit pensions can convert these pensions to the accumulation phase and combine with their own super. However, post 1 July 2017, all death benefit pensions must either continue or be commuted and cashed.

Death benefit pensions will count against the recipient’s transfer balance cap, except in the case of children of the deceased. The deceased’s children will generally be limited to a share of the general transfer balance cap or a share of their parent’s transfer balance account.

The 2017 super changes may bring forward the time at which death benefits must exit the super system for individuals with larger superannuation balances.  Also, with the elimination of anti-detriment, financially independent adult children who receive a death benefit from their parents will pay a tax rate of up to 17% on the taxable component.

 

Benefits being paid to a spouse

As a lump sum

When a superannuation death benefit is paid to a spouse as a lump sum, the entire benefit will be tax free. Those members who are in receipt of a social security benefit, be aware that if the death benefit pension was one to which the grandfathered social security income test applied, commuting to a lump sum may result in moving the balance to the deeming system.

Where spouses do not have debts or other obligations that need to be met, they may intend to gift the money or commit it to a trust. Typically, the basis for this would be that they don’t need all their funds to provide for their immediate needs. They could potentially benefit in the long-term through an increase in age pension benefits.

As a pension

Spouses will not be able to have a death benefit pension that is larger than their transfer balance cap that applies when the death benefit pension is counted to their cap.

In some cases, where the spouse already has a retirement income stream of their own, the available transfer balance cap may be less than the standard maximum cap.

A pension larger than the available cap may revert to the spouse. However, to bring the total counted pension benefits within their cap, the spouse will need to either commute a portion of the reversionary pension to cash, or commute and rollover a portion of their existing pension to the accumulation phase.

The latter will enable the spouse to maximise the amount retained in the super system if that is the best outcome.

These rules also apply to other beneficiaries who can receive a pension, other than children of the deceased.

 

Benefits being paid to children

As a lump sum

If the child is not a death benefits dependant, the taxable component will be taxed at up to 17% (including the Medicare levy). Where this may be the case, consideration should be given to implementing a re-contribution strategy. This strategy can increase the tax-free component of the superannuation benefit and reduce the tax that would be payable on a death benefit.

Funds passing to minors and others under a legal disability will be held on trust. Where there are such beneficiaries, a testamentary trust should be considered and the estate nominated with appropriate provisions included in the Will.

Child death benefit pensions

These can only be paid to minors, dependants under age 25 and those who meet the definition of being disabled described in Subsection 8(1) of the Disability Services Act 1986.

The most important issue is whether a child pension would really be desirable. A testamentary trust may be a better solution as:

  • Minors and adults with no other income can earn $20,542 pa tax free from income derived from estate assets.
  • A trust can have vesting and other rules that can be protective of the beneficiary. Conversely, if a death benefit is paid as a child pension, the child will generally control their own superannuation from age 18.

In the case of a disabled child, there may be other considerations. For example, many such people will have a parent who is over 60 at death and as such, the disabled child can receive a superannuation pension tax free for the rest of their life.

 

Lump sum payments to estate

Payment to an estate may be necessary where there are no dependants, however a super death benefit pension cannot be paid to an estate and payments to an estate can only be a lump sum.

In other cases, it may be done so that a testamentary trust can be created or as part of a wider estate planning strategy.

To the extent the ultimate beneficiaries are not death benefit dependants, the estate will be taxed on any taxable component. Unless there is an untaxed element, the tax rate cannot be higher than 15%.

With advanced planning, one possible strategy is where it’s determined that a surviving spouse doesn’t require all of the available assets when they are widowed. This would involve pointing a share of the death benefit to adult children via the estate, where the money would not be caught under the social security deprivation rules.

 

Withdraw super before death

It may be desirable to withdraw some or all of the super balance prior to death when a proposed beneficiary is not a death benefit dependent of the deceased.

Provided the fund member is either over 60, or otherwise capable of receiving the benefit tax-free, then no tax would be payable. Alternatively, if the superannuation benefit is paid at death, tax of at least 15% on the taxable component would be payable.

Most commonly, this approach may be appropriate where the fund member is either terminally ill or very elderly and in poor health.