Superannuation Changes: Estate Planning

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1 2017 Superannuation Series Superannuation Changes: Estate Planning In the third instalment of our Superannuation Changes series, we consider the impact these changes will have on your estate planning affairs. THE AFTERLIFE AND AFTERMATH OF SUPER CHANGES In our previous pieces, we have explained the $1.6 million transfer balance account and what effect this will have on superannuants affairs during their lifetime. But what does it mean from an estate planning perspective with consequent tax implications? One key question is: if a death benefit puts a member over the $1.6 million balance, can the amount stay within the superannuation environment? The answer is yes, to an extent, but this will depend on: 1. Whether the recipient is a dependent; 2. The amount they already have in a superannuation pension; and 3. Whether part (or all) of their current pension balance will be commuted. Case Study: Barry & Beatrice Remember Barry & Beatrice from part two of our series? Beatrice has $2.5 million in her superannuation account as at 1 July 2017, of which $1.6 million is in pension mode and $900,000 is in accumulation mode. Barry has a pension balance of $1.1 million. Suppose Beatrice dies but has made a valid death benefit nomination for 100% of her superannuation to pass to Barry. As Barry already has $1.1 million in a pension account, he cannot retain all of Beatrice s pension as a death benefit pension, as the combination of the two would see Barry s transfer balance account exceed the maximum $1.6 million.

2 2017 SUPERANNUATION SERIES 2 Barry has two options: OPTION 1 Barry retains his $1.1 million balance in pension mode and takes only part of Beatrice s pension Pension mode Top up to Barry s pension Flows out of super Barry would retain $500,000 of Beatrice s death benefit as a pension, bringing his total transfer balance account to $1.6 million This however still leaves $2 million of Beatrice s superannuation to address Per the death benefit nomination, $2 million is commuted as a lump sum to Barry and flows out of superannuation As $2 million is now held by Barry personally, any on that $2 million are taxed at Barry s marginal rate, which is likely to be in excess of the superannuation tax rates OPTION 2 Barry commutes his own $1.1 million pension and retains Beatrice s $1.6 million pension Barry s pension commutes back to accumulation Barry continues Beatrice s pension Flows out of super By commuting his $1.1 million pension back to accumulation mode (but it is still kept in the superannuation environment), Barry s transfer balance account reduces back down to nil Barry can then take Beatrice s $1.6 million death benefit in full as a pension, increasing his transfer balance account up to the maximum $1.6 million, plus he still has his $1.1 million accumulation balance Barry therefore has $2.7 million in superannuation: $1.1 million in accumulation (concessionally taxed at up to 15%) and $1.6 million in pension (tax-free) Beatrice s $900,000 accumulation account then flows out of superannuation and is paid as a lump sum to Barry directly, with any future taxed at Barry s marginal tax rate OUTCOME: By commuting his own $1.1 million pension to accumulation and accepting Beatrice s $1.6 million pension, Barry can keep an additional $1.1 million within the concessionally taxed superannuation environment. PENSION ACCUMULATION NON-SUPERANNUATION Option 1 $ 1,600,000 0% $ Nil 15% $ 2,000,000 Option 2 $ 1,600,000 0% $ 1,100,000 15% $ 900,000 Marginal tax rate (likely >15%) Marginal tax rate (likely >15%)

3 2017 SUPERANNUATION SERIES 3 TO REVERT, OR NOT TO REVERT On the death of a member, there are two types of pensions that can be paid to a dependent spouse as a beneficiary: reversionary and non-reversionary. In short, the differences are: NON-REVERSIONARY NOMINATION The member has discretion as to the form of payment (i.e. to take as a lump-sum or pension) REVERSIONARY PENSION The member has no discretion as to the form of payment and the death benefit must be paid as an income stream (subject to the $1.6 million cap) A credit to the beneficiary s transfer balance account occurs on the day the trustee determines to pay the death benefit The amount of the credit is equal to the balance in the deceased s account on the date of death plus any received between the date of death and pension commencement. So, if the total balance on commencement causes the recipient to exceed their $1.6 million cap, the excess must be taken as a lump sum and flow out of superannuation Whilst the dependent spouse becomes entitles to the pension from the date of death, the credit to their transfer balance account does not occur until 12 months after the date of death The amount of the credit is the balance in the deceased s account at the date of death (not 12 months later); therefore, any movement in the deceased s account over that following 12-month period does not count towards the beneficiary s $1.6 million cap and can stay within superannuation In a nutshell, the certainty as to the form of payment and possibility to retain a somewhat higher amount in superannuation may mean a reversionary pension is more desirable than a non-reversionary pension. However, this needs to be balanced against other factors such as a desire for flexibility in the form of payment and implications associated with unwinding existing pensions. TWO CERTAINTIES: DEATH AND TAXES We note there are no changes in the way death benefits from superannuation will be taxed under the new rules. In the majority of cases, this sees most benefits continue to be paid to a dependent spouse or minor child tax-free. Tax may however apply if the death benefit is paid to a non-dependent beneficiary, for example, adult children. Tax rates for non-dependant beneficiaries will be 15% or 30% on the taxable component + Medicare Levy; these rates vary depending on the underlying make-up of the taxable component. Planning ahead: by taking action now, you may be able to reduce tax paid on death benefit payments. Proper forward planning could mitigate this tax impact.

4 2017 SUPERANNUATION SERIES 4 INSURANCE PROCEEDS Where life insurance is held within superannuation, the proceeds paid out on death will be deemed to be accumulation benefits rather than pension benefits and now subject to the following practical constraints: WHAT ABOUT THE CHILDREN? Child pensions have been a useful tool to allow maintenance expenses for minor children to be funded from a tax-effective environment. As a result of the new transfer balance cap, there will now be a limit imposed on the amount of capital that can be used to commence a child pension and the amount will depend upon whether the deceased parent commenced a pension during their lifetime or not. 1. If the proceeds are taken by a dependent beneficiary as an income stream and would put the surviving beneficiary s transfer balance account above the $1.6 million cap, the excess must be paid to the surviving beneficiary directly, thereby leaving the concessionally taxed superannuation environment altogether; 2. Insurance proceeds can no longer be used to commence child pensions where the deceased member operated a pension account. Accumulation Where the deceased s balance is entirely in accumulation mode the cap applicable to the death benefit will be $1.6 million, split proportionately amongst the dependants (including both spouse and child pensions). Accumulation + Pension Where the deceased operated both an accumulation and pension account(s), the children may receive a benefit in the form of a child pension from the deceased s pension account, but must take their share of the deceased s accumulation account as a lump sum. Pension Where the deceased operated a pension account, the cap will be the amount of the deceased member s transfer balance account at the time of death (which may be in excess of $1.6 million by virtue of ), then split proportionately amongst the dependents. The key consideration for members now will be whether to hold life insurance policies inside or outside of the superannuation environment the answer to which depends on the member s age, balance and family situation. Minor children are entitled to a transfer balance cap from each parent and the amount credited from a deceased parent s benefit does not count toward that child s own cap in the future. Warning: if not properly considered, a nomination in favour of a child pension which causes a total death benefit in excess of the child s proportionate transfer balance cap can result in benefits being paid directly to the minor child (via their guardian) in an unprotected way. It may therefore be more desirable to direct part of the benefit to a superior asset protection vehicle, such as a testamentary trust.

5 2017 SUPERANNUATION SERIES 5 FAILING TO PLAN = PLANNING TO FAIL The way your superannuation is structured in your lifetime will have an impact on your superannuation beneficiaries. Importantly, the right actions taken now may minimise the tax paid by your beneficiaries, maximise asset protection, and ensure superannuation is used to its utmost potential. Considerations include: Revisiting your death benefit nominations: who are your beneficiaries and what are the tax implications? Reversionary v. non-reversionary pensions Strategies to reduce your taxable superannuation component to therefore the tax paid by your non-dependent beneficiaries Insurance: inside or outside of superannuation? As always, these considerations will need to be considered alongside other wealth accumulation and asset protection objectives. PLANNING FOR PEACE OF MIND The changes to superannuation may affect your estate planning intentions or existing arrangements, and will need to be carefully considered in light of your circumstances. Our approach to Estate Planning has been developed over many decades around our Plan for Peace of Mind Process. It is only through proper planning that all relevant issues, needs, concerns, risks and opportunities can be dispassionately identified and actions put in place, prioritised and addressed in an orderly manner. If you would like to discuss any of the above further and how they might apply to your circumstances, please do not hesitate to contact any member of your Client Service Team or Anne-Marie Tassoni, Director Private Wealth Management, on or am.tassoni@cameronharrison.com.au. ABOUT CAMERON HARRISON Cameron Harrison is an Asset Management and Wealth Advice firm forged on independence in form, substance and thought. Cameron Harrison provides investment management and advisory services through two business divisions: Cameron Harrison Asset Management (CHAM) and Cameron Harrison Private (CHP). Our Partners and staff own the firm meaning our clients always get informed and refreshingly different perspectives, focusing on Investing for Peace of Mind. Our expert portfolio managers have over 20 years of collaborative investing experience and the skills to guide investments in domestic and international equities, fixed income and multi-asset class strategies. And we re flexible, providing strategic and technical advice to business owners, individual investors and family groups. Cameron Harrison is driven by excellence, distinguished by thought and dedicated to client success. Cameron Harrison Level 3, 90 Collins Street, Melbourne, Victoria 3000 GPO Box 1559 Melbourne, Victoria cameronharrison.com.au Disclaimer: This document is provided for information purposes only. While every effort has been made to ensure the accuracy of the information in this document, its accuracy, reliability and completeness is not guaranteed. Past performance should not be relied on as a guarantee of future performance. Except for liability that cannot be excluded by law, Cameron Harrison Private, its directors and employees disclaim all liability for any error or inaccuracy in, misstatement or omission from, the information contained in this document or any loss or damage suffered, directly or indirectly by the reader or any other person as a consequence of relying on this information. Cameron Harrison Private, its directors and employees may have holdings in securities named in this article; however, Cameron Harrison Private does not consider these holdings to be sufficiently material to compromise the recommendations or advice. Performance is based on a model which is representative of the equity holdings and should not be relied upon to make any investment decision Cameron Harrison Private Pty Ltd ABN AFSL