DEATH & SUPER. Andrew Andreyev

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1 DEATH & SUPER Andrew Andreyev

2 How this seminar is structured Case study format More information is available in the detailed Seminar Paper If you provide your details on the Feedback Form we will send you: Seminar Slides Seminar Paper

3 What is this all about? Maximising certainty Maintaining necessary flexibility Protecting assets Minimising tax Achieving intended outcomes Looking after your family Not simple scenarios but common

4 Background facts

5 Married (separated) De facto relationship George Jane (51) Fred (60) Wilma Deceased Lives at home and studies full-time Henry Judy (27) Elroy (23) BamBam (26) Dino (30) Married to Henry with one young child Mentally disabled and lives with Jane and Fred Lives out of home and in estranged from Fred Astro (2)

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7 George No EPOA No EPOG No Will No Nominations No EPOG Jane s Will (20+ years) Jane (51) Fred (60) Dino George Binding Death Benefit Nomination (2000) Super Fund Deed (2001) Enduring Power of Attorney

8 (1) Income stream for life Jane (51) DECEASED (2) Residual capital Fred (60) 25% 25% 25% Henry Judy (27) Elroy (23) Grandchildren BamBam (26) Education trust Following BamBam s death Nominated Charity

9 $50K Jane (51) Fred (60) Balance of Estate BamBam (26) Following BamBam s death Dino (30) Nominated Charity

10 Sale of Sprocket Industries

11 Sale of Sprocket Industries Objectives: Minimise tax Maximise super CGT SBCs: 15 year exemption Retirement? Other concessions CGT cap amount

12 Contribution summary: $1,775,000 $500,000 under the CGT retirement exemption A further $755,000 up to the CGT cap amount $450,000 in non-concessional contributions $50,000 in concessional contributions (prior to June 2012)

13 Outcomes As little as no tax Maximum super Tax-free income in retirement

14 Family Assets

15 Undeducted contributions CGT exempt amounts Pre-83 contributions Post-6/94 invalidity Crystalised segment (pre-2008) Insurance Policy Crystalised in 2008 Income Year Taxed element Untaxed element Contributions segment Non-concessional contributions CGT cap amount Concessional Contributions Life insurance proceeds Government schemes Sprocket Industries (proceeds) Tax-free component Taxable component taxed element Taxable component untaxed element $3 million

16 Jane s life insurance

17 Summary of super interests Jane Fred Tax-free component $1,705,000 - Taxable component - taxed $1,050,000 $600,000 in the fund Taxable component - $500,000 - untaxed in the fund Total super interest $3,255,000 $600,000

18 Summary of family s total assets Jane Fred Super interests $3,255,000 $600,000 House - $750,000 Cash at bank $1,245,000 - Total assets $4,500,000 $1,350,000

19 Jane s Objectives

20 Jane s existing Will 100% Grandchildren Judy (27) Jane (51) DECEASED George If only separated from George BamBam (26) Elroy (23)

21 Jane s existing Will 50% Judy (27) Grandchildren Jane (51) DECEASED 50% If divorced from George Elroy (23) BamBam (26)

22 Jane s Binding Nomination If valid and 100% binding Jane (51) DECEASED George Non-lapsing? Super Deed? Formalities? Minutes? Jane (51) DECEASED 50% 50% Judy (27) Grandchildren Elroy (23) BamBam (26)

23 Jane s Binding Nomination Galaxy Fund If invalid or not binding Grandchildren Judy Elroy Fred BamBam

24 Challenging the outcome Super Complaints Tribunal (SCT)? Supreme Court? Inheritance family provision legislation?

25 Supreme Court or Succession Act Supreme Court Standing? Remedies? Succession Act NSW Right to claim? Amount claimable? Notional Estate

26 Summary of the outcomes George may end up with all of Jane s Estate Judy and Elroy may end up with all of Jane s personal Estate (if a divorce is formalised) George may end up with all Jane s super, if her Binding Nomination is still valid and they are not divorced Judy and Elroy may end up with all Jane s super if her Binding Nomination is still valid and a divorce is formalised Fred and Elroy may end up with all Jane s super if the Binding Nomination is not valid or binding

27 Providing a life interest to Fred

28 Types of super benefits available Lump Sum Benefit Income Stream Benefit Reversionary Income Stream Benefit

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30 Is Fred entitled to a benefit?

31 Setting up the pension New v Reversionary Limiting Fred s right to capital: Binding Death Benefit Rule Deed of Mutual Will

32 Death Benefit Rule Super Fund Deed/Minutes Specify how the benefit it to be structured Ensure cant be amended/commuted Provide what happens on termination Retain interest in capital

33 Deed of Mutual Wills Agree on how to deal with family assets Two options: Agree to provide pension (tax-free income) Agree to provide capital (reduced benefits tax)

34 Assets remain in super Income stream Benefits tax Galaxy Fund Fred (60) Jane (51) DECEASED Capital payment No benefits tax Jane s descendants Fred (60) Assets pass out of super

35 Taxation of the pension

36 Who will control benefits? Fred and Elroy will control the super fund What if Elroy dies? Individual v company trustee Binding nominations DBRs Constitutions Independent Fred (60) Elroy (23) Galaxy Fund Trustee Company Galaxy Fund Fred Elroy Judy

37 Summary of outcomes Fred will receive a super income stream for life Fred will not be able to commute the pension The other super trustees (directors) will provide a check-and-balance against Fred s unilateral actions No tax will be payable on fund earnings, or on the receipt of the pension benefit by Fred On Fred s death, the underlying capital will be available to fund the benefits to Jane s children and grandchildren

38 Passing on the capital

39 Options Directly from the Galaxy Fund Through Jane's Estate Combination of both

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41 Direct or via Estate? Must be allowed by Super Deed Direct must be SIS dependant Judy and Elroy Yes BamBam Most likely Grandchildren No Payment via Estate Greater control (conditions) More complex tax issues

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43 Taxing Jane s descendants Same treatment as lump sum Tax-free/taxable Proportionate rule Tax status of Jane s descendants Judy non-tax dependant Elroy tax dependant (if financial dependence) BamBam tax dependant (if financial dependence) Grandchildren non-tax dependant

44 Managing the tax liability Using non-super assets to pay entitlements Establishing the Galaxy II Fund Using one or more child pensions Base case benefit tax liability is $165,375 No planning Taxable Taxable Tax-free Tax Taxed in the fund Tax Untaxed in the fund Tax Other assets Total Tax Value $1,705,000 $1,050,000 $500,000 $1,245,000 Judy Non-dependent $426,250 $0 $262,500 $43,313 $125,000 $39,375 $311,250 $82,688 $1,042,313 Elroy Tax-dependent $426,250 $0 $262,500 $0 $125,000 $0 $311,250 $0 $1,125,000 BamBam Tax-dependent $426,250 $0 $262,500 $0 $125,000 $0 $311,250 $0 $1,125,000 Grandchildren Non-dependent $426,250 $0 $262,500 $43,313 $125,000 $39,375 $311,250 $82,688 $1,042,313 $165,375 $4,334,625

45 Using non-super assets Super benefits to tax-dependants Other assets to non-tax dependants Saving of $63,254 (over base case) Applying non-super assets Taxable Taxable Tax-free Tax Taxed in the fund Tax Untaxed in the fund Tax Other assets Total Tax Value $1,705,000 $1,050,000 $500,000 $1,245,000 Judy Non-dependent $263,214 $0 $162,097 $26,746 $77,189 $24,315 $622,500 $51,060 $1,073,940 Elroy Tax-dependent $589,286 $0 $362,903 $0 $172,811 $0 $0 $0 $1,125,000 BamBam Tax-dependent $589,286 $0 $362,903 $0 $172,811 $0 $0 $0 $1,125,000 Grandchildren Non-dependent $263,214 $0 $162,097 $26,746 $77,189 $24,315 $622,500 $51,060 $1,073,940 $102,121 $4,397,879

46 Establishing the Galaxy II Fund Galaxy Fund benefits to tax-dependants Galaxy II Fund benefits to non-tax dependants Balance up entitlements with non-super assets Saving of $165,375 (over base case) Using Galaxy II Fund Taxable Taxable Tax-free Tax Taxed in the fund Tax Untaxed in the fund Tax Other assets Total Tax Value $1,705,000 $1,050,000 $500,000 $1,245,000 Judy Non-dependent $502,500 $0 $0 $0 $0 $0 $622,500 $0 $1,125,000 Elroy Tax-dependent $350,000 $0 $525,000 $0 $250,000 $0 $0 $0 $1,125,000 BamBam Tax-dependent $350,000 $0 $525,000 $0 $250,000 $0 $0 $0 $1,125,000 Grandchildren Non-dependent $502,500 $0 $0 $0 $0 $0 $622,500 $0 $1,125,000 $0 $4,500,000

47 Using child pensions Prolong the time money is in super no harm Child pension can be paid to: Children under 18 Children between 18 and 25 who are financially dependant Children with a disability

48 Who will be in control? Elroy, if Fred has died Include appointment of Judy in DBR Independent guardian/trustee (for BamBam)

49 Summary of outcomes Jane will use a combination of direct payments from super, super income streams and payments through her Estate to achieve the best outcome for her descendants Jane s Binding Nominations/Rules, the income stream terms, and Jane s Will all need to work in concert to achieve her objectives As a general rule, the following order of priority would apply: Income stream benefit terms Lump sum benefit terms Will terms to balance up

50 Fred s objectives

51 Dying intestate Who will control his Estate? Letters of administration Statutory entitlements: Jane: Personal effects, $350k + half the balance Dino and BamBam will share the other half Who controls Fred s super? Jane and Elroy (or just Elroy) Dino and BamBam miss out Public offer fund?

52 Binding Nominations? Directly from super to BamBam Through Fred s Estate into a trust for BamBam Remaining within super as a pension Better tax environment Better asset protection No benefit tax on Fred s death

53 Challenging Fred s objectives

54 A challenge by Dino Inheritance family provision legislation No specific entitlement Take into account many factors Importance of Fred s statement

55 Dino acting as Fred s attorney Dino could provide a new nomination to Fred s super fund pay to Dino Fiduciary duty to act in Fred s interest /not benefit Fred should revoke the EPOA Selecting an appropriate guardian for BamBam Checks-and-balances

56 Summary of outcomes If Fred takes no action, his Estate will end up with Jane, Dino and BamBam which is not what he intends By putting in place a binding nomination, Fred will be able to provide a tax-effective income stream for BamBam We would recommend a binding nomination, given that BamBam will not be able to be put in a position of control over his benefit Dino (and Jane) would be able to challenge Fred s intentions. Their chances of success will depend on a number of factors. Fred should nominate a protector/guardian for BamBam

57 Anti-detriment & future benefits

58 Anti-detriment Getting contributions tax back Many practical issues: Calculating the benefit Funding of benefit payment Concessional contribution caps Sufficient future fund income

59 Anti-detriment calculation

60 Future benefit liability deductions Deduction for the payment of a benefit (including pension) following death or disability Is available following incapacity i.e. not just death Does not require an additional payment to be made Fund must elect not to claim deduction for premiums Benefit to non-tax dependant may incur significant tax

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