Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?

Legal Tip 165: What is a Superannuation Proceeds Trust (SPT)?

A SPT is a special trust set up within a will, often as a sub trust of a Testamentary Discretionary Trust.

It is designed to segregate superannuation death benefits that may be paid into the estate by the trustee of any superfund in which the deceased person was a member. The proceeds may include payments from insurance policies and therefore could be large. With many people now their largest asset is their super and people super is generally increasing over time too. Therefore it would be unfortunate if the largest asset is taxed.

A SPT is designed to avoid taxation – totally.

Everyone with a spouse and/or minor children should consider incorporating a SPT in their wills.

See more on the taxation side in my tax tips
Tax Tip 162: Taxation of Superannuation Proceeds Trusts Tax Tip 162: Taxation of Superannuation Proceeds Trusts

and

3 Strategies to Save Tax on Super at Death 3 Strategies to Save Tax on Super at Death

 

The tax treatment remains the same whether super flows through a specific trust or direct to estate beneficiaries in any event. The look through approach is so often misunderstood and then ignored.

The taxation of some elements of super is commonly missed by many lawyers when they do a deceased estate. They fail to advise beneficiaries who arent a death benefit dependent (ie adult children) that they have a proportionate entitlement to an untaxed element of death benefits they must declare and pay tax on.

eg Dad passes away two years after MUm and has $500K of cash and super accounts with a $400K value. (Lets assume he doesnt own a house). Two beneficiaries exist - One is his 21 year old son attending uni who lived with Dad. The other is his elder daughter (age 30) married and living interstate. Each inherit 50%.
The estate value is say $900K. Son inherits $450K and so does Daughter. However Daughter would be taxed at 15% (30% if the fund was a untaxed fund eg state govt, commonwealth) on $200K of her inheritance. She is not a dependant and is aged over 18 in any event. The son is financially dependant on Dad and so no tax consequence arises.

Terry's SPT would allow all the $400K to be streamed to the son and remain untaxed and if the will provided, the Daughter would still receive the same inheritance - But its 100% tax free. Saving $34000 tax (Medicare levy of 2%!!)

Paying superannuation death benefits

The definition of a dependant is slightly different for:

A who you can pay a death benefit to (superannuation law)
B how the death benefit will be taxed (taxation law).

Under superannuation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• a child of the deceased (any age)
• a person in an interdependency relationship with the deceased
  • this is a close personal relationship between two people who live together, where one or both provides for the financial, domestic and personal support of the other.

Under taxation law, a death benefit dependant includes:

• the deceased's spouse or de facto spouse
• the deceased's former spouse or de facto spouse
• a child of the deceased under 18 years old
• a person financially dependent on the deceased
• a person in an interdependency relationship with the deceased.

There is an exception...., a person is included in the definition of a death benefit dependant if they receive a super lump sum because the deceased died in the line of duty. This will be as a member of the defence force, the Australian Federal Police or the police force of a state or territory, or as a protective service officer.

The other matters solicitors can routinely gloss over include:
- Ignoring CGT costbase advice / guidance and information to beneficiaries
- Ignoring contingent "date of death" CGT liabilities when calculating assets / estate splits...In cases when one beneficiary takes "property" and another takes cash this can be problematic.

While many lawyers are strong in terms of tax laws they may lack the practice experience. For this reason a large number of solicitors engage a tax adviser. Those that dont may leave a tax legacy with the beneficiary and remain exposed to a PI claim. We have recently assisted two taxpayers with such claims.

 

There would be a difference in tax out comes between situations such as this

a) superannuation death proceeds paid into the estate with spouse and adult children being entitled to the estate in equal shares.

In this case the adult children are no tax dependants so there will be higher tax payable.

Compared to
b) superannuation death proceeds are paid to the estate and segregated into a SDT of which only tax dependants are beneficiaries - if a spouse and adult children are left behind only the spouse would be a beneficiary and no tax would be taxable.

An equilisation clause could then be used to adjust the rest of the estate so the spouse's share is reduced and the adult children's share is increased.

Net result is more benefits for the family individually and as a whole.