This week our friend Tim Miller of Miller Super Solutions examines the new laws that have come into effect regarding Self Managed Superannuation Funds.
Estate Planning – New laws means new thinking Tim Miller, Miller Super Solutions - 25 November 2016 -
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 recent 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 for 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 taking on trusteeship and getting access to a tax free lump sum benefit prior to 25, perhaps it’s all in the education of the child.
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 or pre-25 financial hardship, therefore resulting in the income stream option only being available to the surviving spouse (we can presume the unlikeliness of a pension to someone in an interdependent relationship, but acknowledge it is possible). 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 or alternatively do we just take a lump sum on the death of our spouse because our own balance is significant and with the indexation to factor in we might be better off waiting for a higher cap in the future? With the repealing of the 6 months commutation rule for death benefit pensions and the new 12 month rule ensuring all legitimate reversionary pensions have time to make a decision before benefits are counted against someone’s cap, timing becomes a huge issue, particularly when a spouse dies before retirement. In that scenario if a pension is commenced the dependents personal transfer balance cap is set in stone. Albeit they will still have access to commutations but subject to the release of Income Tax and Superannuation Regulations it is unlikely these commutations of death benefit pensions will be able to be retained in an accumulation interest.
To give an example of what this might look like, if the spouse, age 45 receives $1.6m pension in 2017/18 from their deceased spouse then the surviving spouse has used their entire cap. If they subsequently commute and take a lump sum of $1.7m at the end of the year their Transfer Balance Account will be debited $1.7m resulting in an account of negative $100,000 but they have used 100% of their personal transfer balance cap so in the future they will only be able to recommence a pension for $1.7m! This is despite whatever the Transfer Balance Cap might be by the time they retire.
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 a better strategy for some. Regardless, estate planning will forever be a significant part of superannuation and one that we must be ever vigilant about. SMSFs continue to provide the greatest flexibility, or possibly certainty, with regards to estate planning within the superannuation environment, but only if appropriate planning is done.
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