Financial Planning
Superannuation and Estate Planning

Superannuation is becoming one of the most important issues in the lives of the Australian population. Superannuation will become increasingly so as the Federal Government continues to instigate policies and strategies that encourage people to save for self funding retirement.

The availability of tax deductible spouse contributions, the introduction of Transition to Retirement, superannuation "splitting" and access to tax fee income post 1 July 2007 have all been designed to encourage Australians to contribute more to superannuation. Accordingly more and more money leaves the regular tax environment and finds its way into the "tax haven" of superannuation where it is concessionally taxed.

In future decades Australia will witness the largest shift in wealth ever witnessed in its history. "Baby Boomers" will die and leave their wealth to the next generation. Included in this wealth shift will be their superannuation savings.

The nature of the payment of superannuation death benefits and the tax consequences that flow from these payments is complex to say the least.

Since the introduction of the superannuation guarantee contributions ("SGC") nearly all full time and part-time workers are accumulating superannuation. Now each time there is a death of an Australian who receives employer SGC contributions a superannuation death benefit payment follows in addition to balances accumulated elsewhere.

The changes for Superannuation announced in the 2006 Budget will be a tax exempt "bonanza" for those over aged 60 as at 1 July 2007. But with this change comes a "cost". Unless paid to a "tax dependent" at the time of death, the deceased's superannuation account will be taxed at a minimum of 16.5%. A hidden death tax????

What plans are in place for the wealth shift and the payment of superannuation death benefits? Has any real consideration been given to the plans that will be invoked to manage these benefits? What is an estate plan any way?

An "Estate Plan" should be seen as a definitive guide as to the orderly and most tax effective and asset protective transition of the wealth from one generation to the next.

A Will is an essential element of, but only forms part of, the estate planning process.

The significance or the consequences of the payment of superannuation death benefits must be of paramount consideration in today's estate plan. This is particularly the case when the benefits are generated from residual pension capital of the deceased.

Individuals don’t "own" their superannuation entitlements and therefore cannot make provision for them in their Will. They can however provide direction, if and when their superannuation death benefit entitlements find their way into their estate, to their Legal Personal Representative ["LPR"] (the Executor(s) of their Will) as to the division of their death benefits.

Paying super death benefits – who decides?

It is the Trustee of the Fund that ultimately decides where the death benefit of the deceased is paid. It is not a decision of the member's family or their executor.

The nature and complexities associated with the taxation of death benefits and how they should be paid requires review on a regular basis even where there exists a Binding Death Nomination. When there is a change to the financial or family circumstances of the individual, consideration must be given on whether there needs to be a review of the estate planning arrangements. At the time of the commencement of a pension, estate planning considerations should also be examined.

Paying super death benefits – who benefits?

To determine who receives the benefit of the proceeds from the deceased's superannuation fund, we must consider superannuation and tax legislation.

Who is a dependant?

In addition to confirming for tax purposes the definition of "dependant", the Superannuation and Tax legislation also determines the tax consequences of the payment of superannuation death benefits.

Under superannuation law, the recipient of superannuation death benefits must be one of the following:

1. The deceased’s spouse or de facto partner; or

2. The tax dependant children of the deceased, being children under the age of eighteen (18) years still undertaking schooling or yet to commence schooling; or

3. Anyone who had an interdependent relationship with the deceased; or

4. A party who was financially dependant upon the deceased.

The changes to the payment of superannuation death benefits announced in the 2006 Budget potentially destroys current estate planning strategies within superannuation. Payments to non-tax dependents will attract tax of 31.5% for untaxed and 16.5% for taxed components from the deceased's member's account. Consequently careful planning by suitably qualified advisors is essential to introduce strategies to mitigate this "cost" to the next generation.

The Role of the Legal Personal Representative

A superannuation fund member is unable to direct the Trustee of the Fund, to which they are a member, as to who will receive their death benefits once the death benefits are paid. However, once the LPR, in their capacity as the Trustee of the Estate of the deceased is in possession of the superannuation death benefits, the provisions of the deceased Will prevails. It is at this point that as the Testator of their Will the deceased can make provision for the payment of their death benefits.

Superannuation is becoming more and more significant as to wealth and retirement funding in this country. The necessity to meld together an estate plan that deals with both non-superannuation and the superannuation assets of the deceased is now imperative.

Was the deceased a beneficiary of or did he or she control a Trust, discretionary or otherwise, during their lifetime? What personal assets did the deceased also leave? Was the deceased's surviving tax dependant spouse his second wife?

The deceased had children from his first marriage one of which, even though adult, is disabled. His other son, who has three small children, has a gambling and alcohol addiction. The deceased wanted to make arrangements for both his sons with the benefit of his estate to eventually to pass to his grandchildren after his current spouse enjoys them during her lifetime.

The example in the previous paragraph is not uncommon.

The introduction of the "interdependency" provisions into Superannuation and Tax laws enhance and expand the definition of "dependency". The nature and complexities of pensions either reversionary or otherwise are also difficult and complex to follow.

It is vital in a comprehensive estate plan to meld a plan and strategies that provide for all of the individual’s "wealth", regardless of where it "resides" to enable an orderly, tax effective and asset protective transition of the client's wealth from he or she to the next generation, with a minimum of angst caused to the beneficiaries so as to maintain harmony amongst the recipients.