Death of an SMSF Member- Achieving Family Succession Objectives. Allan Swan, Principal, Swan & Yii Pty Ltd

Transcription

1 Death of an SMSF Member- Achieving Family Succession Objectives Allan Swan, Principal, Swan & Yii Pty Ltd

2 Overview, Learning Outcomes & Disclaimer OVERVIEW: Australian superannuation generally (& self managed superannuation in particular) is a mixture of advantages, opportunity & pitfalls. This workshop tracks the operation of a self managed superannuation fund during the period from the death of a fund member to the commencement of a pension (other than a life interest pension) or the payment of a death benefits lump sum. LEARNING OUTCOMES: 1. To be able to compare the attributes of a life interest pension, a account based death benefits pension, an estate funded life interest and family trust funded income stream To be able to recall & apply the knowledge gained from the presentation. DISCLAIMER: All Estate Planning EQUATION publications & materials (including this & other presentation slides & notes, Personal Trust Summaries, Schematics, Illustrative Documents & Case Studies) are copyright. They are prepared for educational & general information purposes only & should not be relied on as (or in substitution for) legal, accounting, financial or other professional advice. AEP Chapters 9, 15, 16 & 17

3 The Parallel Case Studies Scene 6 (Yasmin & Abdul are both now 80 planning for their funds to last for the 2 nd generation; wanting to block challenges)

4 80 Yasmin s Family 2 adult children (preferred capital beneficiaries) Domestic partner (hostile relationship with Yasmin s 2 children) Hostile 3 older children from earlier relationship 57 year old partner (preferred beneficiary) 2 younger adult children (preferred beneficiaries if mother has died) 80 Abdul s Family

5 Scope for Family Challenge Ex - NSW Jurisdiction Aggrieved Family Member Can claim against Deceased Estate Pre death family law litigation can be completed Including superannuation & life insurance paid into deceased estate Most APRA Supervised & Public Sector Super Funds Separate litigation, e.g. via Superannuation Complaints Tribunal Loans & retained profits owed to deceased estate No claim against a surviving joint tenant STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review

6 Scope for Family Challenge NSW Jurisdiction NSW Resident Individual Claim by aggrieved family member against Family law litigation commenced pre death can be completed post death Deceased Estate Includes assets passing to surviving joint tenant Assets Gifted away during Clawback Period Family Trusts & Super Funds Ex- NSW Resident Individual STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review NSW real estate + NSW domiciled companies & APRA super funds

7 Kowalski v Kowalski (1) 80 year old surviving spouse left a mere right of occupation of family home in husband s Will Residual beneficiary was willmaker s daughter from previous relationship No requirement in Will that executor provide a substitute home or (what is now) a refundable accommodation deposit

8 Kowalski v Kowalski (2) Court of Appeal noted that portable life interests & accommodation funds are now an orthodox solution confirmed order to vary Will to Pay lump sum $100,000 to domestic partner Existing family home to fund portable life interest Executor to provide substitute residence or refundable accommodation deposit as needed by domestic partner

9 Objectives for Providing Lifetime Only Benefits Pre aged care accommodation Aged care & nursing accommodation Use of lifestyle assets, eg beachside apartment, rural retreat, Tuscany villa Income support In each case, with retention of control of transfer of capital when lifetime benefit ceases

10 Funding for a Lifetime Benefit Personal assets (including personally owned shares & units & unpaid present entitlements) Payments into deceased estates, eg super death benefits not passing direct to dependants Family trusts net unallocated assets Defined benefit super fund Industry, retail, public sector & other non-self managed account based super SMSFs

11 9 Lifetime Only Benefit Options Exercise of Control Will Options 1-5: accommodation fund, income generating fixed life interest, capital reserved testamentary trust & protective trusts Family Trust Options 6-7: income stream via forward income resolutions or personal (non-transferable) right of occupation SMSF Options 8-9: standard (or lifetime) account based death benefit pension or (via deceased estate) benefits under the member s Will STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review

12 Where Wealth is Already in an SMSF Income tax concessions for income stream dependants, e.g. tax free income if deceased No CGT payable when SMSF is in pension phase Retention of assets in SMSF no triggering of transfer duty (an issue in NSW, Qld & SA) & loss of creditor asset protection

13 Payment Choices for Superannuation Death Benefits Death benefits tax may be payable on lump sum payments Fund Trustee Able to commence death benefit pension Lump Sum Dependant Deceased Estate Income Stream Dependant Includes all adult children Includes domestic partners, children under 18 years & adult children with a significant disability Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

14 Dependants 4 Definitions Starting definition Dependant s10 SIS Act Lump Sum Dependant r6.22 SIS Regs Death Benefits Dependant s ITAA 1997 Income Stream Dependant r6.21(2a) SIS Regs Expands s10 definition slightly for lump sum purposes Narrows definition to expose most financially independent children to death benefits tax Narrows definition to exclude most adult children key exception being adult children with a significant disability Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

15 Disability 2 Key Definitions Superannuation Child Death Benefits Pension Special Disability Trust Permanent sensory, physical, psychiatric or intellectual Permanent sensory, physical, psychiatric or intellectual Substantially reduced learning, mobility or communication Centrelink assessed as not able to work unsupported more than 7 hours per week Needs ongoing support services Needs ongoing support services Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

16 Child Death Benefits Pension Pensions tax free if deceased fund member commenced pension & attained 60 years Fund Member Dies Compulsory cashing (at age 25) of death benefit pensions paid to children who don t have a significant disability Fund Trustee Fund Member s Child Pension paid at least once annually minimum (but no maximum) percentage applies For as long as child is less than 18 years, pension is paid to child s guardian Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

17 80 Hostile 3 older children from earlier relationship 57 year old partner (preferred beneficiary) 2 younger adult children (preferred beneficiaries if mother has died) 80 Abdul s Family

18 Reversionary v Non-reversionary Pensions Reversionary Pension Non - Reversionary Pension Automatic transfer of pension when initial pensioner dies Most adult children not eligible to be reversionary pensioners Difficult for other family members to challenge Reversionary pensioner takes over estate planning control Death benefits can be paid as a lump sum instead, e.g. to fund a testamentary or protective trust Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

19 80 Abdul s Family 2 adult children (preferred capital beneficiaries) Domestic partner (hostile relationship with Yasmin s 2 children) 80

20 Life Interests V Standard Death Benefits Pensions Taxable income Accounting income definition Willmaker able to choose remainder beneficiary Often leads to ongoing tension between life & remainder beneficiaries Tax free or 15% tax offset on most super income Super pensioner or trustee of super fund usually determines remainder benefit Not an option for most children Strategy + Structuring + Superannuation + TAX + Trusts + Wills) x Review

21 Standard Death Benefit Pensions V Life Interest Pensions Surviving pensioner decides re pension balance No maximum caps on annual pension payments Relative certainty re ATO position Initial pensioner decides pension balance & annual maximum cap Modified SMSF deed Pension ceases if fund not SMSF compliant Uncertainty re ATO position STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review

22 Life Interest Pension (LIP) SMSF deed amended to set terms & restrictions for LIP & predetermine residual beneficiaries post LIP SMSF Trustee Joins SMSF as individual member when OM dies Original Member (OM) Includes back-up life interest in Will Lifetime Recipient OM s Executor(s) LIP ends at earlier of death of lifetime recipient or SMSF non-compliance, e.g. bankruptcy of lifetime recipient OM s surviving domestic partner or child with significant disability Residual Dependant(s) Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review OM s children or deceased estate

23 Features of Life Interest Pension (LIP) SMSFs only (because of industry/retail fund portability) Established via specially modified deed & pension document Maximum annual payments (equal to or above minimums) Cease to be paid if SMSF ceases to be complying fund, eg because life interest pensioner [LIP] becomes bankrupt If ceased during LIP s lifetime, replaced by life interest from deceased estate of original member [OM] If ceased on death of LIP, account balance paid to OM s dependants or into OM s deceased estate Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

24 Thwarting a Family Challenge Ex- NSW Jurisdiction Individual Joint Tenancy Family law litigation commenced pre death can be completed post death Gift to Family Trust Must be delivery of gift may be accompanied by secured or unsecured lifetime loan back Contribution into Super + Binding Death Benefit Nomination Transferring from NSW Based APRA Super Fund Also important to avoid NSW real estate & companies domiciled in NSW STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review

25 Thwarting a Family Challenge NSW Jurisdiction Individual Pre- relationship Lifetime Gift to Family Members Clawback rules apply + pre death family law litigation can be completed Pre- relationship Gift Funded Capital Reserved Trust Must be delivery of gift may be accompanied by secured or unsecured lifetime loan back Changing residency to ex-nsw Real estate, domicile of proprietary company & APRA super fund may also need to be changed STRATEGY + Structuring + Superannuation + Tax + Trusts + Wills) x Review

26 Business Real Property (BRP) in an SMSF (3) Retention Post Member s Death BRP can only remain in SMSF if account balances of newly admitted/remaining members are or have become high enough Strategy + Structuring + SUPERANNUATION + Tax + Trusts + Wills) x Review

27 LRBA Bank / Other 3 rd Party Lender Full recourse loan to related party permitted Related Party Lender Loan to SMSF trustee must be limited recourse lender has no access to any other SMSF assets Beneficial owner receives all income from asset & pays all expense SMSF Trustee e.g. fund member, family company e.g. land on a single title + associated car parking units Single Acquirable Asset Estate Planning EQUATION = (Asset Protection + OWNERSHIP OF FUNDING + Strategy + Structuring + Superannuation + Tax + Trusts + Wills) x Review Custodian (Security) Trustee Legal owner (e.g. on land title)

28 LRBA Funding Options SMSF Trustee + Custodian Trustee + LRBA lender Joint Tenancy Higher interest rates & legal fees Gift to Family Trust Need sufficient equity in home / other non- SMSF asset Contribution into Super + Binding Death Benefit Nomination Tax effective utilisation of retained profits Transferring from NSW Based APRA Super Fund Useful option if obstacle is contribution caps Estate Planning EQUATION = (Asset Protection + OWNERSHIP OF FUNDING + Strategy + Structuring + Superannuation + Tax + Trusts + Wills) x Review

29 Australian Estate Planning CCH online service Author: Allan Swan 1-4 Introduction to Estate Planning 5 Contingency Funding 6-10 Asset Protection/Structuring Vulnerability & Decisions Wealth Transfer on Death Wills/Testamentary Trusts Protective Trusts 27 Philanthropic Trusts Post Death Income Streams 31 Business Succession Planning Preventative Estate Planning Illustrative Documents For details of Estate Planning EQUATION's training services, see Strategy + Structuring + Superannuation + Tax + Trusts + Wills) x Review