Estate Planning – don’t set and forget

By Tim Miller
(Miller Super Solutions)


According to the powers that be, superannuation is to be used to provide income in retirement and not as an estate planning vehicle.  By and large we can all accept this and there should be no issue getting all parties to agree to this overriding purpose. However, death has a funny way of messing up everyone’s plans so perhaps we can all agree that the purpose of super will always incorporate appropriate estate planning measures, but what are those measures?

With the likely passage of the Government’s Superannuation reform combined with the SMSF requirement for trustees to consider the insurance needs of the members it is imperative that trustees and members alike are aware of the ramifications of death at all times during a member’s life, giving particular attention to the period that members have dependent children.

Children under the age of 18 at the time of a parents death have historically been the recipient of superannuation proceeds in the form of an income stream, or perhaps lump sum, to accommodate payments in excess of the needs of the surviving spouse, given that in many instances this spouse controls the distribution of income to the children particularly prior to 18.  In light of the introduction of the Transfer Balance Cap from 1 July 2017 should these children now be given preferential treatment of the income where the surviving spouse has significant superannuation savings of their own?  This question will no doubt raise an element of complexity to superannuation estate planning, at least in the early years, given any income stream will not count towards any dependent child’s Transfer Balance Cap but will the surviving spouse. It also raises the issue of control because at what point (perhaps 18 and one day) does the spouse lose control of the money with the children getting access to a tax free lump sum benefit prior to 25.

Once a child is no longer a dependent then this will change the planning tactics as an income stream in no longer possible, assuming no disability, therefore resulting in the only income stream option being available to the surviving spouse.  At this point the conversation around estate planning needs a change of direction.  Do we consider commencing an income stream for the spouse because their own superannuation balance is insufficient to worry their own future Transfer Balance cap or do we disregard the future Transfer Balance Cap for those with higher balances and just utilise it now with all future superannuation remaining in accumulation – thus paying lump sums rather than income stream benefits.  Alternatively do we look at paying an income stream for the 6 month grace period and then commuting it right on the anniversary?  What will the ramifications be of this transaction?  If the pension is commuted 6 months after the date of death isn’t it no longer a death benefit?  If this is the case and it is rolled back to accumulation then it is also not counted against the spouses Transfer Balance Cap.  But if the rollover is done 6 months and one day have we now tarnished the benefit as measurable against the cap subsequently locking us in to the cap for that year regardless of the commutation.

To give an example, if the spouse, age 45 receives $1.6m pension in 2017/18 from their deceased spouse and the pension is paid for 7 months then the spouse has used their entire cap.  If they then commute $1.7m at the end of the year their Transfer Balance Account will be debited $1.7m but they have used 100% of the cap so in the future they will only be able to recommence a pension for $1.7m?

Pensions versus lump sums will inevitably be linked to current versus potential future superannuation balances, or perhaps the capacity to retain benefits in accumulation in the future will dictate that taking a pension first up is the better strategy.

Estate planning will forever be a significant part of superannuation and one that we must be ever vigilant about.  SMSFs clearly provide the greatest flexibility with regards to estate planning within the superannuation environment.


General advice warning:
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information, so please consult your financial adviser.

Miller Super Solutions is the SMSF education & training creation of Tim Miller, assisting SMSF professionals and trustees with the practices associated with establishing, running and ultimately closing down SMSF’s

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