Article published by RJS Wealth Management Pty Ltd
One of the more complex areas affected by the upcoming super reforms is the subject of death benefits. Of particular concern is how death benefits passed on by a spouse are affected by the new $1.6m Transfer Balance Cap How to structure your affairs to support your dependents when you are no longer there to do so is also an area of interest. We explained the Transfer Balance Cap in an earlier article but didn’t mention death benefits as this topic warrants a blog of its own.
When it comes to managing death benefits one of the most important things to remember is that while you can inherit a death benefit pension (an income stream from your deceased spouse or parent) you can’t inherit their transfer balance cap. This means it’s up to you to take action to avoid any death benefit pension you receive from a deceased spouse or parent exceeding your Transfer Balance Cap. You’ll need to speak to your financial adviser or accountants and wrap your brain around some tricky subjects. Not an easy task when you are mourning a loved one.
To give you an idea of the complexity of this topic, the ATO has released a series of Law Companion Guideline document for accountants and financial advisers to help explain the super reforms and how to treat them. The one for this topic is nearly 50 pages long.
Super death benefits can only be paid to a beneficiary if that person was a dependent at the time the member died. A dependent is a spouse, a child under 18 years (or under 25 if financially dependent or has a disability) or a person with an interdependency relationship with the deceased2.
A child can receive a death benefit as a pension but it must be commuted and paid as a lump sum by the time they turn 25.
As we know, if you have more than $1.6m in pension phase of your super, you must adjust your pension balance to be less than $1.6m by 1 July 2017 or suffer penalty. So, if you’re the beneficiary of a death benefit pension and your own super pension balance is close to the $1.6m cap you will need to be careful. Your TBC remains unchanged and can’t exceed $1.6m.
If your spouse passes away and receiving their death benefit pension means your TBC will be exceeded, you’ll have to commute any excess funds in your pension account back into accumulation. This is relatively straightforward with the help of your trusty financial adviser. Your excess funds will then remain in accumulation from which you can extract them as a lump sum payment or roll into pension if there is any TBC wriggle room.
To achieve the above and be compliant with the TBC, while you’re mourning your much loved husband or wife, you’ll have to spend time structuring your superannuation to avoid penalty. Trish Power from Superguide considers this six month timeframe too onerous, especially considering that other estate planning issues can take up to 12 months to plan and implement1.
Before 1st July, both you and your spouse should make any current pensions reversionary. This way, if either of you die, it gives the other (or any dependent beneficiary) 12 months before the income stream is credited to their transfer balance account2. An extra six months to arrange financial affairs is far less stressful for grieving family members. Existing retirement accounts can remain in pension phase, still receive tax exemptions and stay within the super system until the 12 months is over. This gives breathing space for both rearrangement of financial affairs and a reasonable period of grieving before the reality of financial decisions must be faced.
Case study 1: John and Marcia both have super pensions worth $1.6m at 1 July 2017. Marcia passes away in April of 2018. Marcia had not made her pension reversionary with John as the beneficiary so he only has six months to commute his pension balance back to accumulation before her balance is transferred to his account and he breaches his TBC. It’s a tough time for John, made tougher by this requirement.
Case study 2: John and Marcia both have super pensions worth $1.6m at 1 July 2017. Marcia passes away in April of 2018. Marcia made her pension reversionary with John as the beneficiary so he has twelve months to commute his pension balance back to accumulation before her balance is transferred to his account and he breaches his TBC. It’s a tough time for John, made easier by the breathing space to organise his financial affairs.
If you nominate your minor or dependent children as beneficiaries of your death benefit pension they also become subject to transfer cap limits. Their TBC is limited to the value of retirement assets when they first receive the death benefit. These death benefits are intended to sustain most dependent children until they turn 25 when any pension should be commuted and a lump sum paid out. At this point the child’s TBC is reset to zero, awaiting the day when they begin their own retirement1.
If a parent has superannuation assets in accumulation but has not yet begun a pension, their surviving children are entitled to an income stream up to the general TBC. If there are more than one child, they receive a proportionate amount.
Case study 3: Alex (12) and Harry (14) are the children of Paul, a widower with a super balance of $1.9m. He passes away in 2018 when the general TBC is $1.7m. He has nominated his two lads to receive equal shares of his death benefit pension. Each boy can receive a death benefit pension of $850,000 and the remaining $200,000 must be received as a lump sum death benefit.
There are many possible scenarios for parents leaving children death benefit pensions and different ways to deal with super funds in pension phase or accumulation. Your decisions will change how your dependents receive their legacy. To set up your kid’s future for the best possible result if the worst occurs, you need to speak to your financial adviser.
As July 1st 2017 looms ever closer, it’s time to really start ticking off your super reforms to do list. The decisions you make regarding your ultimate demise might be uncomfortable to make, and that time seem very far off, but no one wants to leave their kids or spouse without proper provision and support should the unthinkable happen early, or when the inevitable occurs many years down the track. Speak to your financial adviser and set up your affairs to allow for a distribution of your assets that’s as stress free as possible for those you leave behind.
Need help with this daunting and complex task? Call the experts at RJS Wealth Management on 1300 27 28 29 and prepare your finances for your future and the future of your loved ones.
Have you made the hard decisions and prepared your super fund for distribution if you make an early exit?
1. Superguide: Trish Power, Feb 2017–Superannuation death benefits transfer balance cap
2. Cleardocs: Clear law–Superannuation reforms: Thinking about death benefits
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