There is still far too much confusion about the role of superannuation, especially self managed superannuation funds (SMSFs), in estate planning warns Michael Hutton, head of wealth management at HLB Mann Judd Sydney.
“As a result, estates may not only end up paying unnecessary tax, but superannuation balances can also be distributed in a way a member didn’t want,” he said.
“Properly managed, in addition to its main role of helping ensure a comfortable retirement, a SMSF can provide excellent estate planning benefits.
“However, anyone leaving a large superannuation balance cannot rely solely on a Will to ensure their intentions are carried out. To allow them to implement the best strategy they must understand the tax implications of balances paid out to non-dependants, amend the SMSF Trust Deed if necessary, and have a Death Benefit Nomination as well as a Will.
“Unlike other assets, superannuation is held in trust and is not owned directly by the member of the fund. Consequently it usually falls outside the scope of a Will. As superannuation monies can represent a large proportion of a person’s wealth when they die, it is important to consider it in any estate plan. This requires understanding the rules and their implications.”
Mr Hutton said the trustee of a superannuation fund can pay death benefits to an estate or directly to a dependant, such as a spouse, a child, or a financial dependant.
“Some tax may be payable on distribution, although not if the recipient is considered to be a “death benefits dependant” such as a spouse, child under age 18, or a financial dependant. So whenever appropriate, superannuation balances should be paid to death benefits dependants to avoid unnecessary tax.
There are many estate planning options that can be taken with SMSFs that may not be possible with a public offer superannuation fund, Mr Hutton said.
“With SMSFs it is possible for death benefits to be paid as a pension to a death benefits dependant rather than as a lump sum, which means the fund doesn’t need to be wound up. The fund’s investment portfolio can remain intact and the lifespan of the SMSF extended – a benefit not always available with public offer superannuation.
“Arrangements can also be made to pay a SMSF balance to a specific beneficiary as a pension without giving them access to the capital. However, whatever a member’s intention is, the SMSF Trustee must make sure the Trust Deed enables the proposed strategy.
“Another SMSF benefit is that it can have up to four members, for example parents and two children. Such SMSFs can be a good tool to facilitate intergenerational wealth transfer tax effectively.
“To achieve this, parents who do not need all of their superannuation can take a pension out of the SMSF and gift it to children, who can then, within contribution limits, re-contribute it into the fund in their own name.
“Such planning can help in a number of situations such as allowing a family business property to remain in a family SMSF even after the death of a key member of the fund.
“Another advantage of a SMSF is that death benefits can be paid in-specie, meaning non-cash assets can be transferred direct to a beneficiary. This can be handy for unlisted or illiquid assets such as a property, or even listed assets such as shares. However, applicable stamp duty would be payable,” Mr Hutton said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
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