The introduction in July 2017 of the $1.6 million Transfer Balance Cap (TBC) (to read more click here) also applies to pensions paid to your dependants after you die (called death benefit pensions or reversionary pensions.
The main changes that you need to plan for in the event of death include:
- Where you wish to pay a death benefit pension, your beneficiary’s TBC will be relevant in determining how much can be paid as a pension to them. Any excess death benefit above their TBC must be paid as a lump sum to them. This limits the amount of money that can now be retained within the superannuation environment upon your death.
- Where your dependant has already used some of their TBC, you will need to carefully plan to:
– limit accruing any excess transfer balance earnings and applicable tax,
– maximise the amount of benefits remaining in your SMSF or the super environment, and
– minimize the amount of death benefits that must be paid to your beneficiaries as a lump sum.
- The changes to reversionary pensions and in particular understanding:
– the limited circumstances where a transition to retirement pension can revert to someone else,
– the special rules to delay when the reversionary pension counts to the new recipient’s TBC and managing any excess, and
– the difference in how reversionary and non-reversionary pensions count to the new recipient’s TBC.
- The special rules that operate to modify the TBC of a child in receipt of a death benefit pension to ensure that their personal TBC is not exhausted.
- The ability for a recipient of a death benefit pension to rollover the pension to another super fund although to satisfy the regulatory rules, a new death benefit pension must be commenced or the amount must be withdrawn from the superannuation environment as a lump sum death benefit.
- The changes to your SMSF claiming a deduction for an anti-detriment amount associated with the payment of a death benefit lump sum.
Given the significant shift in the landscape with respect to SMSFs and estate planning, we also strongly recommend that trustees have their SMSF trust deed reviewed to ensure maximum flexibility when dealing with excess TBC amounts, rollover of death benefits, reversionary pensions and child pensions. This should be done alongside the review of any binding death benefit nomination(s) you have in place to ensure that they too are valid and provide the certainty in how your death benefits will be dealt with upon your death.
The payment and tax treatment of death benefits paid from an SMSF has traditionally been a complex area, with the need to obtain advice from a specialist. With the recent introduction of the TBC, the need for specialist advice is ever so important.
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Disclaimer and Warning
The information above is of a general nature only. It should not be used as a source to make financial decisions. It’s also important to note that the legislation and figures related to this topic tend to change regularly and therefore the information above may not reflect the current status. We recommend that if you are looking for advice on this matter, you should contact us.