If subsequent to your death the benefits are paid to a “non-tax dependant”, such as an adult child or the executor of your estate, there is a taxable component of 17% (inclusive of the medicare levy) which is payable on the distributed amount.

Example:

A 75-year-old client suffered a relapse of a cancerous condition which had been in remission. As the medical prognosis was for a limited further life expectancy, he didn’t wish to undergo any further treatment. His wife had predeceased him and he had one adult non-dependent son and two infant grandchildren. Before he died we prepared a new Will for him which provided for a discretionary testamentary trust with his son and grandchildren as the primary beneficiaries as to the capital (referred to as a bloodline trust). His superannuation nomination was changed so that his superannuation member benefits were paid to his estate. Accordingly his benefits formed part of the bloodline trust subsequent his death resulting in enhanced asset protection and taxation benefits for his son and grandchildren.

When he contacted us, his self-managed superannuation fund (SMSF) had assets which consisted of cash on deposit, public company shares and a commercial property which had been his business premises, but which was rented to the subsequent business owner.

As he was in pension mode regarding the payment of his member benefits, his stock broker was instructed to transfer the public company shares from the SMSF into his name by way of an off market transfer. He also took the cash out of the SMSF bank account and put it into his personal bank account. The property was then transferred (also in specie) into his own name. None of these transactions incurred any capital gains tax (CGT) or, in the case of the transfer of the property, any Victorian Stamp Duty.

At the commencement of the exercise, the superannuation fund balance totaled $3,253,295.

Within this balance, the taxable component of his benefits was $923,919, resulting in a Future Death Benefit Tax (FDBT) liability of $138,588 if the benefit were paid to the Estate in accordance with his latest Binding Death Benefit Nomination. The difference in the taxable component was because the building held by the SMSF used to be his business premises which some years before he had transferred into the SMSF.

Prior to his death a total of $1,932,991 was taken out to deplete the taxable components, therefore minimizing the future taxable portion of the fund to $23,520, which lowered the potential FDBT from $138,588 to $3,528 achieving a net tax saving of $135,060.

On his death, the assets formerly held as part of his member benefits by the SMSF (the public company shares and the commercial premises) together with the sale proceeds of his residence and other personally held assets all became assets of the discretionary testamentary trust without incurring either CGT or Victorian Government stamp duty. Any future CGT incurred by the Trust would be on the increase in value of the assets from the time when they were transferred into his name, with a 50% discount on any gain which could be split between the beneficiaries of the discretionary testamentary trust.

If you are seeking Estate Planning advice concerning assets inside superannuation (or otherwise), contact our team today.

The post When should you take your superannuation benefits out of the fund? appeared first on Tony Kelly Lawyer & Estate Planner.

1. Who can receive my superannuation when I die?

Superannuation death benefits can only be paid to an individual if they are your dependant. For the purposes of the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’), a ‘dependant’ in relation to a person is:

• Their spouse;
• Their child (regardless of age); or
• A person with whom they have an ‘interdependency relationship’. Whether two people have an ‘interdependency relationship’ depends on the following factors:
  • They have a close personal relationship;
  • They live together;
  • One or each of them provides the other with financial support; and
  • One or each of them provides the other with domestic support and personal care.

Often, clients instruct us that they would like their sibling or parent to receive their superannuation when they die. Unless they have an ‘interdependency relationship’ with such family member, such relative cannot receive their superannuation directly. Clients can, however, make a nomination directing that their superannuation death benefits are paid to their Estate (i.e. to their Legal Personal Representative). Such death benefits will as a consequence of such nomination be distributed in accordance with the Deceased’s Will, with no restrictions as to who can receive them.

2. How do I “bequeath” my superannuation?

As indicated above, superannuation is held separately to your personal assets in a superannuation trust on behalf of the fund’s members, and so simply making a gift of your superannuation in your Will is not sufficient to deal with your death benefits. Instead, you must make a nomination directing the Trustee of your superannuation fund to pay your death benefits in accordance with your instructions.

The requirements for a nomination may vary according to the rules of the fund, but generally, in order to be binding, these nominations must be signed in the presence of two independent witnesses and submitted to the Trustee. If the Trustee does not receive your nomination before your death, it will not be valid and binding on the Trustee.

If your super fund permits, we recommend making your nomination non-lapsing, so that you do not have to renew it every three years.  We also recommend reading our blog post on the ability of your attorney to renew your nomination should you lose capacity to make decisions.

The nomination should be expressed in percentages to be paid to the eligible beneficiaries as explained above. For example, Naomi wishes to divide her superannuation between her children and her best friend Janet. Naomi makes a nomination directing her super fund to pay 33% of her death benefits to each of her two children. She also directs the fund to pay the remaining 34% to her Legal Personal Representative. Naomi then makes a Will, bequeathing any funds received from superannuation to Janet. On Naomi’s death, the fund will pay 34% of her death benefits to her Executor, who shall distribute the benefits in accordance with Naomi’s Will. This means that Janet will receive her share of Naomi’s superannuation death benefits, as per Naomi’s wishes, even though she is not a dependant of Naomi.

3. How are superannuation death benefits taxed?

We suggest obtaining specific financial advice as to the taxable and untaxed portions of your member balance to determine unequivocally how your death benefits will be taxed. As a general rule, however, death benefits paid to a tax dependant are not taxed. Please note that the definition of a tax dependant is slightly different to a SIS Act dependant, and includes only:

• A spouse or de facto partner
• A child under the age of eighteen
• Any person in an interdependency relationship with the Deceased

For benefits paid to adult children or your Legal Personal Representative (to be distributed under your Will to non-dependants), tax of 17% will apply to the taxable portion of the benefit. Any untaxed element will be taxed at 32% including Medicare levy.

Many clients are averse to paying such taxes on their superannuation (even though such payment will not occur until after they have died!). If you wish to minimise the taxation payable from your death benefits, you may consider nominating only tax dependants as beneficiaries, and providing for other family members through other means (such as your Will).

If you are of ‘preservation age’ (i.e. over 60), you may also begin withdrawing assets from your superannuation fund during your lifetime. Assets that have been removed from superannuation and that are in your personal name as at the date of your death will not incur the 17% tax, even if paid to a non-tax dependant from your Will. It is important to seek proper financial advice before deciding to draw down on your superannuation early for Estate Planning reasons.

It is also crucial that any such withdrawal requests are made in a timely fashion; if you die before the request is actioned by the fund, and the fund is aware of your death, the request may be treated as a payment of death benefits and taxed at 17%, rather than treated as a payment of a super benefit during your lifetime and not taxed at all.

4. What should I do next?

As a starting point, we recommend logging into your superannuation fund’s website (or otherwise contacting the fund) and confirming:

1. Whether you have a nomination in place;
2. Whether that nomination is binding; and
3. Whether the individuals you have nominated as beneficiaries are ‘dependants’ or your Legal Personal Representative.

If your answer to any of the above is ‘no’, we encourage you to contact us to discuss making a valid, effective Superannuation Binding Death Benefit Nomination. This document should be considered in tandem with your Will and wider Estate Plan. Our experienced and knowledgeable team can assist you in ensuring your superannuation death benefits (along with your other assets) are properly dealt with on your death.

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