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A short guide to SMSF estate planning under the new rules

Anthony Fensom  |  27 Jun 2017Text size  Decrease  Increase  |  
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Self-managed super funds (SMSFs) have been forced to reconsider estate planning due to new superannuation rules coming into effect on 1 July.


With the new financial year fast approaching, here is a quick guide to the changes.

Transfer balance cap

Under the previous rules, SMSF members typically organised a reversionary pension to ensure the surviving spouse could receive the deceased's pension and not need to sell any SMSF assets.

However, the new $1.6 million transfer balance cap now restricts how much of a deceased's super savings can be passed onto the deceased's spouse and children, according to SMSF specialist adviser Monica Rule.

"If a deceased's retirement pension is paid to a surviving spouse, it will count towards his or her transfer balance cap. This means that any excess above the $1.6 million of the deceased's pension will need to be paid out of the super fund as a lump sum death benefit. The excess cannot be retained in the surviving spouse's super account," she says.

"If the deceased was in an accumulation phase prior to his or her death, then their children can only receive a pension up to the $1.6 million cap. The balance of the deceased's accumulation account must be paid out as a lump sum death benefit."

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Death benefit rollovers

The new rules also allow a death benefit pension to be rolled over from one super fund to another without losing its characteristic as a death benefit.

"This is provided that once it has been rolled into a new super fund, the new fund uses the money to pay a death benefit pension from the fund. A death benefit pension cannot be rolled back into an accumulation account," Rule says.

Under the Australian Taxation Office's "Practical Compliance Guideline 2017/6," death benefit rollovers can only be retained in the surviving spouse's accumulation account if done prior to 1 July 2017, where the spouse has commuted the death benefit pension outside the prescribed period (six months after date of death or three months after the grant of probate or letter of administration).

"This practice is no longer allowed under the new super law, although no compliance action will be taken if it is done prior to 1 July 2017," Rule says.

Rule suggests it might be best to leave a death benefit pension to children eligible to receive a pension, such as those aged under 18, or up to the age of 24 who remain financially dependent on the deceased, or any age with a disability.

"This is because a child that receives a deceased parent's retirement pension is not limited to the $1.6 million cap. They are entitled to continue receiving whatever is in the pension account, even if it exceeds the general transfer cap," she says.

Reversionary pensions

For reversionary pensions, if the deceased's pension automatically reverts to the surviving spouse, then it will not count towards the spouse's transfer balance cap until 12 months from the date of death.

The amount counted is also the amount that was in the deceased's retirement pension account on the date of death, even though it is counted 12 months later.

In contrast, if the death benefit pension is "non-reversionary," then the amount is counted when it is paid to the surviving spouse and the amount counted is whatever accumulated in the deceased's pension account when it is paid, Rule explains.

For spouses currently receiving a reversionary pension, the best option is to commute it outside the prescribed period and retain the money in their accumulation account, ensuring the SMSF will not need to sell assets to remove the excess over $1.6 million.

"Of course, if the deceased only died recently, then they cannot commute it and roll back the money into the accumulation account as the timeframe has not expired. Their only option is to remove the excess above the $1.6 million from their super fund," Rule says.

Structuring SMSF accounts

Cooper Grace Ward partner Scott Hay-Bartlem suggests SMSFs may have to consider changes to how accounts are structured.

"Some clients who used to have one big pension will now have pension and accumulation accounts in the same fund. And potentially some clients will hold more assets outside super than inside this environment," he told the SMSFA National Conference 2017.

As a result, a person with $2 million in a single super account might change to having $1.6 million in the pension phase and the remainder in an accumulation account, he was quoted by Professional Planner as saying.

Death benefit nominations

For SMSFs, the latest changes have reinforced the need for members to have up-to-date death benefit or reversionary pension nominations in place.

However, a binding death benefit nomination (BDBN) does not determine whether a pension is reversionary.

"Just because the deceased stated in his BDBN that the pension is to be paid to his wife, this doesn't mean that the pension is auto-reversionary. For it to be reversionary, it must state this in the pension documents at the commencement of the pension," Rule says.

If beneficiaries are not considered as dependents for tax purposes, they could consider a withdrawal and re-contribution strategy to boost their tax-free component.

Alternative strategies such as testamentary trusts could be another option where spouse death benefits need to be paid out of the super system, such as in cases where the transfer balance cap is exceeded.

With the latest rule changes set to commence, SMSFs have been given another reminder of the need for succession plans to be both legally effective and tax-efficient.

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Anthony Fensom is a Morningstar contributor. 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. The author does not have an interest in the securities disclosed in this report.

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