ESTATE & SUCCESSION PLANNING

SMSF-insurance-300x169Your own SMSF gives you flexibility to potentially minimise the tax your loved ones pay upon your death.

There are complicated aspects that should be considered when you set up your SMSF.

There are strategies that can be employed to ensure that your beneficiaries receive your super benefit tax free.

Binding Death Nomination (BDN)

Many people don’t realise that the assets that comprise their super balance is NOT covered by their will.

Each member of a SMSF must prepare and execute a BDN so that their super assets get disbursed in accordance with their wishes upon their death.

The classic example of what can go wrong if you don’t have a BDN, is the case Katz vs Grossman.

In this case, Ervin Katz was the sole remaining member of a SMSF. After his wife’s death some time earlier, Ervin appointed his daughter as an additional trustee to the SMSF to allow the SMSF to continue.

In 2003 Ervin died. Before he died, he indicated as part of his will that he wanted to leave the money equally to his son and daughter. He did not complete a BDN in the super fund.

Upon Ervin’s death, his daughter had her husband join as a SMSF member, which gave them control of the SMSF. The daughter then refused to pay her father’s benefit according to the terms of her father’s non binding request, triggering legal action by her brother (Ervin Katz’s son). The Court Case cost several hundred thousand dollars in legal fees, but by not adhering to her father’s request the daughter did not break the law. She had full control.

All the above could have been avoided with a simple BDN. If Ervin had a BDN in place, his super interest would have been paid in accordance with his intentions. The daughter in the above case would have had no control over the benefit.

Permitted Beneficiaries

The following can be beneficiaries nominated in your BDN’s

• Spouse (includes former spouse, De-facto and same sex couples)

• Child (including an adopted or step child)

• Any person who was a dependent just before death (i.e. relied on you for financial assistance)

• Any person with whom you had an ‘interdependency relationship’ just before death

• Your estate via your Legal Personal Representative (this is usually the executor of your personal will). In this instance, your super assets dealt with in accordance with your will.
Taxation

Everyone’s favourite topic!

The taxation implications for each beneficiary of your super benefit on death are very complicated and are detailed below.

It is tedious reading, so contact Super Initiatives if you need any clarification or assistance.

Spouse

Lump sum payment on death: TAX FREE

Pension payment on death:

• If either you or your spouse is over 60 at the date of death, the pension will be paid tax free.

• If both you and your spouse are under 60 at the date of death, the pension will be taxed at the spouses’ personal tax rate less any tax free amount. Your spouse will also receive a pension rebate of 15%. Once your spouse turns 60, the pension will be paid tax free.
Any Child Under 18

Lump sum payment on death: TAX FREE

Pension payment on death:

• If you were over 60 at date of death, the pension is paid tax free.

• If you were under 60 at date of death, the pension is taxed at the child’s tax rate less any tax free amount. Your child will receive a pension rebate of 15%. Note that a pension can only be paid to a child up to the age of 25. After that time, they must take the remaining super benefit as a lump sum.

Any Child aged between 18 and 25 that is Financially Dependent on you

Lump sum payment on death: TAX FREE

Pension payment on death:

• If you were over 60 at date of death, the pension is paid tax free.

• If you were under 60 at date of death, the pension is taxed at the child’s tax rate less any tax free amount. Your child will receive a pension rebate of 15%. Note that a pension can only be paid to a child up to the age of 25. After that time, they must take the remaining super benefit as a lump sum.

Any Child aged between 18 and 25 that is NOT Financially Dependent on you

Lump sum payment on death:

• Where your super is paid to any child aged between 18 and 25 (who is NOT financially dependent on you), the taxable portion of the payment is taxed at 17%.

• The tax free component of the payment remains tax free to the child.

Planning point: re-contribution strategies are available so that you can maximise the tax free component of your super fund. This means that, on your death, certain beneficiaries can receive this component tax free. Contact Super Initiatives to discuss these strategies further.

Pension payment on death:

• You cannot nominate any child between 18 and 25 (who is NOT financially dependent on you) to receive your super as a pension.

Any Child aged over 25 that is Financially Dependent on you

Lump sum payment on death: TAX FREE

Pension payment on death:

• You cannot nominate any child over the age of 25 to receive your super as a pension – it MUST be taken as a lump sum.

Here lies a great planning point, if you can make your children financially dependent on you, they will inherit your super interest tax free upon your passing. To find out how this is possible, please contact us.

Any Child aged over 25 that is NOT Financially Dependent on you

Lump sum payment on death:

• Where your super is paid to any child aged between 18 and 25 (who is NOT financially dependent on you) as a lump sum, the taxable portion of the payment is taxed at 17%.

• The tax free component of the payment remains tax free to the child.

Pension payment on death:

• You cannot nominate any child over the age of 25 to receive your super as a pension – it MUST be taken as a lump sum.

Any Child Permanently Disabled (regardless of age)

Lump sum payment on death: TAX FREE

Pension payment on death:

• If you were over 60 at date of death, the pension is paid tax free.

• If you were under 60 at date of death, the pension is taxed at the child’s tax rate less any tax free amount. They then receive a pension rebate of 15%.

Any Person who was Financially Dependent on you just prior to death

Lump sum payment on death: TAX FREE

Pension payment on death:

• If you were over 60 at date of death, the pension is paid tax free

• If you were under 60 at the date of death, the pension is taxed at the recipient’s tax rate less any tax free amount and will receive a pension rebate of 15%.

Any Person with whom you has an “Interdependency Relationship” just before death

Lump sum payment on death: TAX FREE

Pension payment on death:

• If you were over 60 at date of death, the pension is paid tax free

• If you were under 60 at the date of death, the pension is taxed at the recipient’s tax rate less any tax free amount and will receive a pension rebate of 15%.

Your Estate via your Legal Personal Representative

Lump sum payment on death:

• Where your super is paid to your estate and your personal will specifies the benefit be paid to someone listed above as a lump sum it will be taxed in their hands as detailed above.

• Where your super is paid to your estate and your personal will specifies the benefit be paid to any person NOT listed above (e.g. charity, friend, grandchild), the taxable component of the payment is taxed at 17%. The tax fee component remains tax free.

Pension payment on death:

• You cannot nominate that your estate receive pension payments from your super fund.

As you can see, this aspect of superannuation law is heavy going and expert advice is required.

Please contact us for assistance regarding your SMSF estate and succession planning needs.