Superannuation, Death and Special Disability Trusts

Superannuation

A common misconception is that a deceased member’s superannuation benefits automatically form part of their estate, which is transferred under their Will.

A deceased individual’s superannuation benefits can only be paid to his or her dependants or their estate. If neither of these exist, then another person may receive the benefits.

In superannuation legislation, dependants are defined to include the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship.

Depending on which individuals receive the superannuation benefit, either through the superannuation fund as a dependant or via the estate, it is necessary to understand how they will be taxed in order to minimise tax on the benefits.

For taxation purposes, a death benefit dependant is entitled to a receive a lump sum benefit from superannuation funds entirely tax free. Depending on the age of the deceased, and the age of the recipient of a pension from the deceased’s superannuation fund, there are various tax concessions and – in some cases – benefits may be entirely tax free.

Death benefit dependants of the deceased for taxation purposes generally include the deceased’s spouse or former spouse, children aged less than 18, or any other person who was a dependant or in an interdependency relationship just before they died.

As a result, most adult children who are not in an interdependency relationship with the deceased would be taxed on the death benefits they receive, unless they are paid out as a lump sum from the tax free component.

Recent legislation changes to pension balance caps also adds a new layer of complication and therefore advice should be sought in relation to your Estate Planning and Superannuation.

Reversionary pensions

These are pensions that automatically continue to be paid to another individual on the death of the original pensioner. At the commencement of a pension, a reversionary beneficiary can be elected depending on the rules of the fund and there can be several tiers of beneficiaries, e.g. benefits first revert to a spouse and then revert to children.

Due to recent changes in the superannuation and tax legislation, the main reasons for using reversionary pensions have reduced in relevance. They may still be an option where there are complex circumstances, or the effective control of the superannuation does not rest with the reversionary pensioner and – as a result – the trustee of the superannuation fund can make decisions that are not in accordance with the original pensioner’s wishes. Another case for using reversionary pensions would be where there is a risk the original pensioner’s estate will be challenged or the original pensioner’s estate is in debt.

In the above circumstances, the reversionary pension would direct the funds to the nominated beneficiary prior to the estate of the deceased or the trustees of the superannuation fund making alternative arrangements.

The introduction of the $1.6 million pension cap rules as of 1 July 2017 has added an additional layer of complexity when determining the appropriateness of utilising reversionary pensions in succession planning. In situations where the surviving spouse may breach the $1.6 million pension cap on the death of their partner, a reversionary pension could prove to be a poor estate planning decision.

Not having a reversionary pension gives flexibility within the family group to achieve the optimum outcome for the family and it gives the trustee the ability to pay a benefit to the estate if that is desirable.

Binding death benefit nominations

Your superannuation benefits DO NOT automatically pass under your Will. A valid binding death benefit nomination is a direction to the trustee of the superannuation fund to pay the death benefit to a particular beneficiary. To be valid, the amount of the benefit payable must be: ascertainable, made in the form prescribed by the trust deed of the fund, and, the nomination must be in effect. A nomination will lapse the earlier of: the date fixed by the governing rules of the fund or 3 years. Without a binding death benefits nomination in place, it is up to the trustees of the superannuation fund to determine who receives superannuation death benefits.

A binding death benefit nomination is useful:

• If the member wants to ensure their bequests to nominated beneficiaries are upheld (particularly in cases of blended families, where there may be some doubt that the member’s wishes will be upheld)
• To specifically exclude a potential beneficiary or to protect a particular beneficiary
• To protect the capital in the fund by having the benefit paid to the estate where the Will could provide additional protection, for example, through a testamentary trust

However, the main disadvantage with a binding death nomination is that it does not consider the situation of the beneficiaries after death and the trustees are locked into a predetermined outcome without flexibility. In uncomplicated circumstances, such as where the member’s spouse is the only other member of the fund, they have control of the fund as trustee and they are likely to abide by your wishes and as such a binding death benefit nomination may not be required.

There have been a number of cases recently involving inappropriately completed binding death benefit nominations and proper legal advice is required before they are put in place.

Re-contribution strategy

With the new contribution caps that came into effect on 1 July 2017, this strategy has reduced in benefit, however, there are still planning opportunities to reduce tax on non-dependant beneficiaries on the death of the member. For those who have mainly adult non-dependant children, one of the options to reduce tax would be an effective re-contribution strategy where most of the superannuation components are taxed components.

Tax free components generally consist of contributions that have not been included in the taxable income of the fund (e.g. non-deductible contributions). Taxable components consist of the balance of the fund.

Tax free components are distributed to non-dependants and not subject to tax. The taxable component paid to non-dependants is taxed at either 17% or 32% (including the Medicare Levy), depending on circumstances.

It is not possible to choose the components that must be drawn from a superannuation interest. Essentially the strategy involves withdrawing benefits that include the taxable portion and re-contributing them as non-deductible contributions. As a result, the re-contribution strategy can increase the tax free components.

This strategy is only possible if: you have met a condition of release to access retirement benefits, are still able to meet the conditions for making contributions and there is sufficient cash to effect this strategy.

Generally, this planning option is beneficial, depending on your circumstances, mainly during the ages of 60 to 75 years of age as there is no tax on superannuation benefits paid to those over the age of 60.

An additional consideration from 1 July is that, if your superannuation balance exceeds $1.6 million, you may not be able to re-contribute the amounts.

Before embarking on this strategy, you need to speak to a licenced financial advisor, such as Allworths Wealth Management.

Special Disability Trusts

A Special Disability Trust is a unique type of trust that allows parents and immediate family members to plan for current and future needs of a person with a severe disability. The trust can pay for reasonable care, accommodation and other discretionary needs of the beneficiary during their lifetime. The trust may be given concessional treatment under the Social Security Act 1991 and the Veterans Entitlement Act 1986.

Special Disability Trusts can have assets worth up to $657,250 (indexed annually) without these assets impacting on the beneficiary’s income support payments such as the Disability Support Pension. This amount is in addition to their residential home.

These trusts can be set up during the lifetime of a parent or can be willed in their estate. The latter would result in a testamentary special disability trust and would be subject to the same requirements.

There are strict conditions to be met in respect of setting up and maintaining these trusts and care needs to be taken.

Setting up a Special Disability Trust would be most beneficial if either you or the person with the severe disability rely on income support and you have sufficient funds to contribute to the trust.

However, a normal testamentary trust may be beneficial if you want to provide a larger pool of funds or to make the funds more broadly available than for just care and accommodation.

Pay for proper advice

As I said in last month’s article, one of my biggest issues in this area is a reluctance to pay for proper advice. Estate planning is a very complex area and you should have your Will prepared by an appropriately qualified and experienced professional. Over the years, I have seen plenty of poorly drafted Wills which simply do not achieve what was desired. At Allworths, we work together with a number of great solicitors who can provide the proper advice.

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The advice in this newsletter is intended to be general in nature and does not take into account your personal circumstances. Before implementing any of the strategies discussed, we recommend you speak to your licenced financial advisor or solicitor.

Allworths Wealth Management Pty Limited (AFSL 457155) is the Wealth Management arm of Allworths Chartered Accountants. For further information please contact us on (02) 9264 6733 or email growth@allworths.com.au.