3 Strategies to Save Tax on Super at Death

3 Strategies to Save Tax on Super at Death

Superannuation death benefits contain different components and 2 of these components can be taxed when they end up in the hands of non-tax dependants.
See my Tax Tip 144: Taxation of Super on death Tax Tip 144: Taxation of Super on death
And
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?

There are a few strategies to avoid this, broadly they fall into 2 categories
a) Diverting the super death benefits to one or more depednants, and/or
b) Cashing super before death.

The strategies fall into either of the above categories:

Strategy 1: Pay the Death Benefits to the Spouse and/or Minor Children
This can be arranged by 3 main methods
a) by making a binding death benefit nomination (BDBN).
b) Hardwiring the superannuation trust deed
c) Pay into a superannuation proceeds trust (SPT).

A BDBN can be made to compel the trustee to pay the death benefits to the spouse and/or minor children or into the estate. A BDBN can also be condtional – such as “if my children are under the age of 18…”

The superannuation deed itself can determine who is to receive a members death benefits – without any trustee discretion involved.

A SPT can be used as the recipient by either directing the BDBN, or the deed directing, that the estate be paid the death benefits and then the will of the deceased can control where the super proceeds end up.

Strategy 2: Withdraw super before death
This can be done by 2 broad methods
a) The member withdrawing it themselves, or
b) The Attorney of the member withdrawing the principals super.
When you know your death is approaching you could simply withdraw your superannuation benefits. This can largely be done tax free where you have reached the preservation age of where there is a terminal illness.

An appropriately drafted power of attorney appointment is also important in this regard because where capacity has been lost the attorney can simply withdraw the members super benefits and leave it in the members person account. This way when the person dies the money will not be super, but will be cash and can then be passed via their will.

Example
Laurie has cancer and thinks he will beat it, but he draws up an enduring power of attorney to allow for Ken at act on his behalf in financial matters. Laurie’s children are both nearly 50 and are not dependants, Laurie’s wife has predeceased him. Laurie has $1,600,000 in his industry superfund and $1mil of this is the taxable component taxed element so this will result in $150,000 tax when the super is received by the adult children.

As the are in the hospital one night preparing for the inevitable the adult children have a meeting and decide with withdraw Laurie’s super in full. They contact the superfund the next day, provide a copy of the attorney appointment and account details and withdraw it into Laurie’s account. They don’t touch the money.

5 days later Laurie dies.

The children have saved $150,000 in tax.

Strategy 3: Superannuation Proceeds Trust

A SPT or Superannuation Proceeds Trust is a trust set up in your will used to segregate the any superannuation death benefits that the estate receives. This is important if the super passes into the estate and superannuation can be taxed at different tax rates depending on who receives it.

See my tax and legal tips on this at
Tax Tip 162: Taxation of Superannuation Proceeds Trusts
Tax Tip 162: Taxation of Superannuation Proceeds Trusts
and
My legal tip at:
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?
Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?

A SPT will have only beneficiaries who are tax dependants (and super depedants) so that there will be no tax payable on the taxed component of the death benefits.

If the death benefits are paid into an estate and there are non-tax benefits that will potentially receive the superannuation death benefits then the executor of the estate will be obliged to pay tax on the proceeds received.

The SPT can be combined with an equilisation clause in the will, if you wish. This can be handy where you have 2 children, for example, and one is under 18 and one is over 18. The super can be directed to the under 18 year old so that it is tax free and the other child can take more of other assets to make up for not receiving any of the super. This way overall both children will benefit more than they otherwise would have if tax was payable on the super.

Seek legal advice before trying any of these at home.

 

@Terry_w who decides when the persons capacity is lost / when the powe of attorney comes into effect?

 

Deepends on the terms of the appointment. Some may require confirmation from one medical practitioner, others may require 3.

 

Hi Terry,

Over the last few months I've found myself in an unfortunate situation where my mother has pancreatic cancer and does not have long left. We are preparing for the worst any day now.

She is 59 years old and retired immediately on discovering her terminal diagnosis. I am one of two adult children (25 and over) and my father is retired and 61 years old.

She currently has non-binding beneficiaries set up that include my father, my brother and myself. As I understand from reading this, as long as we submit a BDBN (like so https://www.australiansuper.com/-/m...eath-benefit-nomination-for-super-members.pdf) for 100% of her super to go to my father it should be all tax free? If any were to go to me or my brother it could be taxed as we are dependents per tax law but not super law. Her AusSuper account has no insurance attached. The amount is about 200k in total. The alternative is to immediately try withdraw the super. I will attempt this but feel more assured if the BDBN has the same result as I'm not sure how long this process will take and her condition is fast deteriorating.

She also has a Mercer account with a smaller amount of 50k, but has a 40k death cover policy that can be claimed. Does any special consideration need to be given if there is an additional policy in place or do the same principles apply? Thanks

 

Hi Terry,
Is there any additional benefit/ flexibility of having a BDBN directing the super benefits to one's estate if the will includes a Testamentary trust?
Cheers,

 

I am sorry to hear. Things can happen very fast with pancreatic cancer too.

It should be tax free if paid to her spouse.

Yes

This might be a better option.

yes you would want to consider this one too. perhaps a BDBN is more important on this one as the insurance proceeds could be taxed at up to 30% on some of it.

 

Thank you Terry. Wondering why this is still a better option?

We will still try to do this but yes things can happen quite quickly we're not sure if it can be done in time before her passing. Especially given time to claim insurance proceeds. So thinking BDBN to my father will cover us in the case something happens and we cannot withdraw in time

 

might be.

it would just be a personal asset once withdrawn. There will be no further need to deal with trustees later on, which can be painful

 

Most trustees will have concerns for a terminally ill person making a new bdbn. They may ignore it. Its important to ensure two medical specialists determine she has faculties to make any changes without infouence