Superannuation Estate Planning Considerations

When it comes to superannuation estate planning, there are a myriad of things to consider. For most Australians the most important points are ensuring their superannuation is passed onto their intended beneficiaries, and minimising the taxes paid in doing so.

Below, we’ve touched on some of the key areas to be aware of. 

What Happens When a Member Passes Away

At a basic level when a member passes away, the Trustee of the superannuation fund must pay out a death benefit in the form of either a lump sum, a death benefit pension, or a combination of the two.

Complexity arises as to how the Trustee determines the beneficiary of a death benefit, the form which those death benefits can be paid, and the tax implications for different beneficiaries. 

Who Are Eligible Beneficiaries

Whilst your superannuation can be paid to your estate, superannuation does not automatically form part of your estate and could bypass your estate altogether.

Eligible beneficiaries who are also able to receive your superannuation include your spouse, children, or anyone who is dependent on you or with whom you were in an interdependency relationship.

This means parents and siblings are usually unable to directly receive superannuation as a death benefit and would only be able to receive a death benefit via an estate.

Tax Dependant vs Superannuation Dependant

To add to the complexity, the definition of a dependant is different in both tax and superannuation legislation. 

This means that there are different tax outcomes depending on who receives your death benefits. It also means that not all beneficiaries are eligible to receive a superannuation death benefit in the form of a pension and can therefore only receive a lump sum.

Taxes on Death

Where an eligible beneficiary receives a death benefit but is not defined as a tax dependant, such as your estate or adult children, they will be required to pay 15% tax on the taxable component of the death benefit.

For example, a death benefit paid to your estate of $500,000, made up entirely of taxable components, would result in a $75,000 tax bill. If the same benefit were paid directly to your adult children, they would also be required to pay a 2% Medicare Levy, increasing the total tax to $85,000.

In addition, capital gains tax may be payable if assets are sold or transferred to fund the death benefit payment. Furthermore, stamp duty could be triggered if property or land-rich assets are transferred to beneficiaries.

These tax implications can significantly reduce the amount your beneficiaries receive and may require the unintended liquidation of assets to physically pay the taxes.

Death Benefit Nominations

Where a member passes away, it is the Trustees of the SMSF who decide who will receive the member’s death benefits. However, there are ways in which the member can bind or guide the Trustee’s decision.

The two most common methods are:

• Binding or Non-Binding Death Benefit Nominations; and
• Reversionary Pensions

As with all things related to superannuation, complexity arises in determining whether nominations made by a member are valid, and if so, which nomination takes precedent.

It is also important that these nominations are reviewed regularly, as both life circumstances and tax rules change over time. What might be appropriate today may not be suitable in the future.

Individual Trustees

One of the main reasons advisers recommend setting up an SMSF with a corporate trustee is the complexity that arises when an individual trustee passes away.

When an individual trustee passes away, an SMSF will often have 6 months to update the Trustee structure of the SMSF or cease to be a superannuation fund. Where there is only one surviving member, this will involve finding and appointing a secondary trustee or appointing a corporate trustee. 

In either case, a Change of Trustee Deed is required and the name on all SMSF assets must be updated to reflect the new trustee. An activity most people don't want to undertake soon after the loss of a loved one. 

Other Key Considerations

In addition to the above, there are several other issues to be aware of:

• Who takes control of an SMSF after death
• Withholding tax requirements when paying a death benefit
• Timeframe to pay death benefits
• Interaction of transfer balance account caps
• The treatment of exempt current pension income (ECPI)
• The treatment of life insurance proceeds
• Updating lease agreements if properties are transferred
• The adequacy of the current trust deed
• The impact of new taxes, such as Division 296
  
  

We Are Here to Help

Whilst superannuation estate planning may seem complex, the good news is that we are here to help. At Ryan's SMSF Compliance we can prepare specialist advice from just $2,500, which can act as a guiding document for you and your beneficiaries, potentially saving you tens of thousands in taxes.

Want to know more? Contact us today!