10 things to check on your estate planning

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The biggest potential impact of the new superannuation rules which will apply from 1 July 2017 is tax of 15% and 30% on the capital for repeated breaches of the new rules.

Almost all the commentary (including this) is quite technical and unfortunately, there’s no avoiding the details to achieve the best outcome.

By now, most of you know the facts. A new transfer balance cap will restrict the amount a person can transfer to a pension from the accumulation phase. The limit will initially be $1.6 million and it is not transferable to a spouse or anyone else. Many people are still talking about increasing their member balances by taking advantage of the last chance to make a non-concessional contribution of $540,000 (being three years’ contributions, covering FY17, FY18 and FY19) each before the caps drop to $100,000 each year.

Traditional super nominations may be sub optimal

Anecdotally, most people have not made superannuation nominations or they have expired. Those who have usually nominate their spouse, but this option may not be optimal now.

In Australia, there are no death taxes as such but there are situations where tax is payable after a spouse or parent dies. This could arise from a simple loss of a separate set of marginal tax rates in terms of income tax. In 2007, the tax introduced on benefits paid to adult children was another ‘back-door’ death tax.

After 1 July 2017, a transition to retirement income stream (TRIS) will no longer benefit from the zero-pension tax but will be subject to the 15% tax on income and 10% capital gains tax on realised gains on assets held for more than 12 months. The strategy to make a lump sum election to access the lump sum low rate cap of $195,000 will also no longer be available. The strategy for a person with a TRIS who has not otherwise met a full condition of release will probably, subject to their circumstances, be to commute such a pension. For those who have met a full condition of release, they should convert to an account-based pension. The current law requires them to commute and restart a new pension but Treasury has advised the law will be amended to reduce this administrative burden.

The new rules mean that if a pensioner (say Lucy) with a superannuation pension balance of $900,000 receives a death benefit pension of $800,000 from her late husband (Malcolm), Lucy would have to cash $100,000 out of super or risk incurring an excess transfer balance tax of 15% on the notional earnings (based on the general interest charge, currently 8.78% annualised) on the excess over the cap for the first breach and 30% thereafter.

One way to manage this is to have Malcolm make the pension reversionary to Lucy and review the death benefit nominations. If Malcolm’s nomination is a reversionary pension in favour of Lucy, the $100,000 will have to be taken out of the superannuation fund. However, with flexibility, the trustee of his super fund has other options.

If Malcolm is in pension phase, before his death Lucy could use an appropriately drawn Enduring Power of Attorney to commute his pension if it is not reversionary to her and restart it as a reversionary pension in favour of Lucy. She could then revert $100,000 of her pension back to accumulation (in the 15% tax environment, not the personal tax environment of up to 49%). Lucy would have 12 months before Malcolm’s pension counts towards the cap and it would not include the earnings since Malcolm’s death.

Subject to their marginal tax rates and the risk of litigation, it may be better to pay Malcolm’s death benefit to his estate or an adult child as, at that stage, we would know their marginal tax rates in that year and their need for asset protection at that time.

Child pensions are also an option if they had a child under 18 or financially dependent and under 25 or with a permanent disability. Children can get $1.6 million from each parent without breaching the new caps.

Unfortunately for people who like to keep matters as simple as possible (a good policy), the new rules require that death benefit income streams must always be kept separate.

Capital Gains Tax (CGT) relief is available to preserve the tax-free status of unrealised gains on assets supporting a pension before 1 July 2017 if they make either the (a) segregated current pension asset election or the (b) unsegregated current pension asset election. In our experience, most trustees use the unsegregated approach.

There is one last chance to fix breaches of less than $100,000 before 31 December 2017 but the CGT relief will need to be activated before 1 July 2017 so we do not recommend that people rely on this.

Checklist before 1 July 2017

  1. Ensure the estate planning consequences of a non-concessional contribution of $540,000 before 1 July 2017 are anticipated.
  2. Where there is a Power of Attorney, ensure it allows a trusted person to attend to changes to the superannuation balance if the member becomes ill before implementing advice.
  3. Split contributions to a spouse with a lower balance.
  4. Use re-contribution strategies without using ‘wash sales’ particularly where there was an intention to use anti-detriment strategies which will no longer be possible after 1 July 2017.
  5. Consider transferring assets out of superannuation if in pension phase.
  6. Make an election to get the CGT uplift on an asset-by-asset basis once the gain is known and understand any other CGT discount available for that asset.
  7. Check that pensions are properly documented as reversionary if appropriate.
  8. Review insurances within superannuation as they are often larger than the member balances and count towards the transfer balance cap. If children are over 18, it may be better to have the policy outside super.
  9. Commute TRISs if they have not met a full condition of release.
  10. Review estate planning strategies if a person and their beneficiary have a combined superannuation balance (including insurance) over $1.6 million.

Until the rules change again, that is.

 

Donal Griffin is a Principal of Legacy Law, a legal firm specialising in protecting family assets. The firm is not licensed to give financial advice so please contact him for a referral to a financial adviser or accountant who specialises in superannuation. This article does not consider any individual circumstances.

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3 Responses to 10 things to check on your estate planning

  1. Donal Griffin May 26, 2017 at 9:35 AM #

    Hi Chris, With the greatest respect, the fact that a pension can be commuted is mentioned in paragraph 9. The rules around commutation are always subject to the rules of the particular superannuation fund. This is a summary of complex matters.

  2. Chris Jankowski May 26, 2017 at 4:17 AM #

    The author of the article says:

    “The new rules mean that if a pensioner (say Lucy) with a superannuation pension balance of $900,000 receives a death benefit pension of $800,000 from her late husband (Malcolm), Lucy would have to cash $100,000 out of super”…

    I think the statement above is incorrect. Consequently, the methods given in the article to deal with the situation are incorrect as well.

    In fact, Lucy has an option of commuting her $900,000 pension into accumulation phase. Then she can commute $800,000 back into an account based pension leaving $100,000 in accumulation phase.
    With the $800,000 of the death benefit pension from her late husband she will be within the $1.6 million cap and still have $100,000 in relatively tax privileged accumulation phase.

    This is actually very simple, tax effective, requires no complex legal structures or maneuvers and no penalties will be due.

    It is worth pointing out that one can always commute their own pension back into accumulation phase if they so desire. The law has not changed in this regard. This is the crucial point that the author of the article missed entirely.

    • SMSFCoach May 27, 2017 at 8:59 AM #

      Chris it will not be that simple as you will need to know what portion of Lucy’s pension counts towards the TBC as her original pension transfer amount may have been 600k and rose to 900k with earnings, so she could accept the whole Reversionary pension. You would not commute her whole $900k as that would disadvantage her by $300k as once back in accumulation the cap the TBC applies to a new pension. So you would nearly always only look to partially commute the survivors pension to facilitate the Reversionary pension if the cap would be exceeded. The increase value in any survivors pension after 1 July 2017 should always be left in Pension Phase as not subject to the TBC.

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