“I am not worried about the tax on my super benefits when I am gone – my children will need to worry about that.” Have you ever had a client make a similar statement when you were suggesting strategies to reduce tax payable on the death of the SMSF member/client?

There may be a number of reasons why the client made that statement, such as:

• they are over age 60, so are not taxed on their pension; or
• they consider it to be a fee generating exercise; or
• they either do not see the benefit or, if they do, are genuinely prepared to leave the problem to their children; or
• a combination of some or all of the above.

Cost of doing nothing

Each of those ‘objections’ may be real – what the client may not understand is the amount of tax which planning now may save in future.

Alternatively, they may consider that the cost of taking action now, so as to obtain a benefit at a later date, may be wasted if, for example, they are able to plan the withdrawal of all of their superannuation prior to their death.

The issue really is not so much for the client, but for those left behind and, unfortunately, given the litigious society we live in, the adviser may be the one most impacted by the lack of planning, despite their best endeavours.

There have been cases in the courts in recent times where children of a deceased member of a SMSF have initiated action against their parent’s adviser, to recover ‘lost’ entitlements. As the parent is not around to blame, and as the adviser will have insurance cover, the adviser represents a relatively easy target. Read the rest of this entry »

Tax and Estate Planning for SMSF Income Streams – Case Study 1 – Priority of cashing of benefits & other options

Bryce has turned age 55 and has decided to commence a Transition to Retirement Income Stream. He has a balance of $400,000 in the accumulation account in his SMSF, and he decides to apply the total amount to commence his TRIS.

As a result of commencing contributions to superannuation at an early stage in his working life (he is still with the same employer he commenced with out of Uni), Bryce’s balance of $400,000 is comprised of each of the 3 separate preservation components, namely:

• Unrestricted non-preserved benefits      $65,000
• Restricted non-preserved benefits         $50,000
• Preserved benefits                              $285,000

To meet his lifestyle needs, Bryce has calculated he will need slightly more than the (normal) minimum, which would be $16,000 ($400,000 @ 4%) in the 1^st year, so he has asked the trustees of his SMSF to pay him $20,000 for that year.

Over the next 3 years, Bryce draws $21,000, $23,000 and $25,000, respectively. Those amounts were within the minimum and maximum limits for a Transition to Retirement Income Stream each year.

At the end of the 4^th year, when Bryce has turned age 59, he decides to purchase a new car and take an overseas trip. He estimates that the total cost of both will amount to $40,000, an amount that exceeds his maximum payment limit under the terms of his Transition to Retirement Income Stream. Read the rest of this entry »

Tax and Estate Planning for SMSF Income Streams – Case Study 2 – Reversionary Pensions & Estate Planning

Joe is a single parent who has recently turned 60 years of age. He has 2 adult children, Peter & Claire, from his first relationship, both of whom have generated significant wealth from owning and operating successful businesses, and a 15 year old son, Tim, from a relationship which has also ended. Joe has full custody of Tim.

Joe has a significant balance in his superannuation, which forms a large part of his overall wealth. He is the sole director of the corporate trustee of his SMSF. He has been advised to commence drawing a Transition to Retirement Income Stream, particularly as the pension payments will be tax free.

Because of different financial positions between Peter & Claire and Tim, Joe’s adviser suggests to him, as part of an estate planning exercise, to:

• establish the Transition to Retirement Income Stream with an automatic reversion to Tim, on the basis that Tim will receive the balance when he turns 25; and
• prepare a Will leaving the remainder of his estate to pass equally between all 3 children.

Joe is pleased with the suggestion, as he feels that divides his wealth in quite appropriate proportions, based on individual needs. He proceeds with:

• the commencement of the Transition to Retirement Income Stream;
• the automatic reversion of the Income Stream to Tim; and
• the drafting of a Will, with Peter & Claire as Executors.

He then forwards copies of all documents to his adviser for his records. Read the rest of this entry »

Understanding the range of options available in proper estate planning is vital to ensuring that the client’s needs are met.  In this article, the advantages and disadvantages of considering either superannuation child account based pensions or using the Will to create testamentary trusts are considered.

Who will be the death benefit beneficiaries?

Superannuation legislation changes from 1 July 2007 have redefined which beneficiaries can receive death benefits as income streams.

The “sole purpose test” determines that a superannuation fund, including an SMSF, is to be maintained so that retirement benefits are to be provided to a member or to the dependants of a member upon the death of that member.  The definition of the “dependants” of a member has been expanded by the Same-Sex Relationships (Equal Treatment in Commonwealth Laws–Superannuation) Act 2008 to include same-sex couples and children of same-sex relationships.

Therefore, a superannuation “dependant” now includes the following:

• a spouse (which includes, a person who, although not legally married to the member, lives with the person on a genuine domestic basis in a relationship as a couple, and whether same-sex or mixed-sex couples);
• a person in an interdependency relationship with the member;
• a child (including an adopted child, a step-child or an ex-nuptial child, regardless of whether they were financially dependent on the member);
• any person who is financially dependent on the member (includes persons who are fully or partially dependent upon the member).

Read the rest of this entry »