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Beware the transfer balance cap trap

Brian Hor  |  14 Jun 2017Text size  Decrease  Increase  |  

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Strategic estate planning can help to reduce the risk of exceeding the transfer balance cap, according to Brian Hor at Townsends Business & Corporate Lawyers.


Strategic estate planning is key to ensuring flexibility in crises. Although you may not consider yourself at risk of exceeding the transfer balance cap following 1 July 2017, you may in fact be at risk, irrespective of your own superannuation account balance.

One of the most important aspects to consider in light of the introduction of the transfer balance cap with regard to estate planning, is considering whether your cap could be exceeded by receiving a binding death benefit nomination, reversionary pension, and/or life insurance policy within superannuation from someone close to you.

This is of particular importance because superannuation is a special kind of asset that does not automatically pass under your will.

Let's look at an example. Adam and Erin have been married for 22 years and have three teenage children. On 1 August 2017, Erin starts an account-based pension with her entire superannuation benefit of $500,000. Erin is not close to meeting the $1.6 million transfer balance cap threshold and therefore doesn't worry about it.

This is what can only be described as the "transfer balance cap trap," and here is why.

Binding death benefit nominations

Adam is involved in a boating accident on 9 December 2017 and passes away with a current binding death benefit nomination in favour of Erin. Consequently, Erin's superannuation transfer balance cap will be credited with the value of Adam's superannuation.

This includes any investment returns accrued from the time of his passing, up and until his death benefit is finalised. This being approximately $1.3 million.

Life insurance within your superannuation

What's more, at the time of his death, Adam has a $1.1-million life insurance policy within his superannuation appointing Erin.

This means that as an additional component of Adam's death benefit, the proceeds of Adam's life insurance policy will also be credited to Erin's superannuation transfer balance cap.

Erin must take action because the credited value of Adam's death benefit will cause her to exceed her transfer balance cap by $1.3 million. Additionally, she is not permitted to roll Adam's death benefit back to an accumulation interest.

Prior to cashing Adam's death benefit as a lump sum, Erin rolls back her own superannuation benefit of $500,000, to her accumulation account.

She now has no option but to withdraw from superannuation all of Adam's death benefit proceeds that exceed $1.6 million so as to not exceed her transfer balance cap.

How can estate planning assist this situation?

If Adam and Erin had obtained estate planning advice at the time that Erin first commenced her account-based pension, the risk of Erin being in this situation and exceeding her transfer balance cap could have been greatly reduced.

Some of the estate planning options that Erin and Adam could have considered with their solicitor in conjunction with their financial adviser, include:

1) Child pensions;

2) Reversionary pensions;

3) Testamentary trust wills;

4) Changing their binding death benefit nomination or superannuation life insurance policy to nominate their respective estates;

5) Taking a death benefit as a lump sum and cashing the benefit out of the superannuation system; and/or

6) The ability to partially commute their superannuation income stream back to accumulation phase, in order to accept a death benefit without exceeding the transfer balance cap.

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Brian Hor is special counsel, superannuation and estate planning, at Townsends Business & Corporate Lawyers. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria.

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