1 July 2017 saw the start of a new set of rules relating to superannuation. A number of changes affect payment of a superannuation death benefit, which may mean your current financial plan needs to be reviewed.
Estate planning and the use of superannuation in the context of death benefits is an important aspect of your financial plan that needs to be reviewed and managed. Members of a couple who have a combined balance of less than $1.6million are unlikely to be affected by these new changes however clients who have a combined balance of more than$1.6 million may be affected by these changes.
These estate planning ramifications are not simply isolated to our retiree clients. The estate planning impact of these changes could similarly affect those who are looking to start superannuation income streams with the source being large value insurance plans. One of the emerging considerations relates to which death benefit nomination to use for existing or new pensions.
Who can commence a superannuation death benefit income stream?
An eligible beneficiary is allowed to receive a death benefit as a superannuation income stream. Eligible beneficiaries include:
- spouse, including de-facto and same-sex partners
- children under 18
- children aged 18 and under 25, financially dependent on the deceased. The income stream must be cashed as a lump sum once the child reaches age 25 (unless disabled)
- a child with an eligible disability regardless of age
- a financial dependant
- a person who satisfies the interdependency relationship provisions.
The 1 July 2017 superannuation changes don’t affect who can commence an income stream. Instead, a new restriction comes in, limiting the superannuation death benefit to be received as a pension based on the $1.6 million transfer balance cap, and there are further restrictions regarding child death benefit pensions.
Limitation caused by transfer balance cap on super death benefit pensions
The transfer balance cap ($1.6 million in 2017-18) in broad terms restricts commencement / continuation of a
superannuation income stream. Where a beneficiary wishes to receive the death benefit as a pension, they need to be within their transfer balance cap. Death benefit pension(s) count towards the transfer balance cap but the timing and the amount depends on whether the beneficiary receives the pension under an automatic reversionary or non-reversionary arrangement.
Automatic reversionary nomination
Receiving a death benefit pension from 1 July 2017 under an automatic reversionary arrangement gives rise to a credit under the transfer balance account, however, there is a delay to provide the beneficiary time to arrange their affairs. The credit arises at 12 months from the date of death of the original account owner and is equal to the value of superannuation income stream on the date of death.
The fact that the credit is equal to the value of the superannuation income stream on the date of death has significance in a number of ways:
- pension balance fluctuations as a result of negative or positive growth are ignored. Instead, the credit towards the transfer balance account is based on the account based pension balance on the original owner’s date of death
- any insurance that was paid for by the pension account is ignored as long as paid and credited to the pension account after date of death (but before pension reversion).
Whether an eligible beneficiary faces a restriction in continuing an income stream under a reversionary arrangement depends on how much of the transfer balance account the surviving beneficiary has used up before inheriting the death benefit pension. There is no definition of an automatic reversionary nomination under tax law. Instead, the ATO has a different, and complex, set of guidelines that your financial adviser has a better understanding of and can help you to understand, relevant to your situation.
Binding nomination (lapsing or non-lapsing)
Receiving a death benefit pension from 1 July 2017 under a binding nomination where the member and / or trustee has discretion to payment of the death benefit as a pension gives rise to a credit under the transfer balance account when the surviving beneficiary becomes entitled to be paid the death benefit income stream. The credit is equal to the commencement value of the death benefit pension.
1 July 2017 introduces another set of rules relating to superannuation. Estate planning through superannuation adds yet another level of complexity, but through sound financial advice, there continues to be opportunities to take advantage of the $1.6 million transfer balance cap, and review your estate plan regularly so it continues to meet your goals and objectives. An automatic reversionary nomination could provide some temporary relief against the transfer balance cap (through the 12 month deferral rule) as well as potentially allow for higher amounts to be retained in pension phase environment.
By being aware of the changes, and speaking to your qualified financial adviser you can put the steps in motion and make more informed decisions in around your superannuation and estate plan with regard to the 1 July 2017 superannuation changes.
Want to know more?
Don’t try and go it alone when professional help is close by. It’s always a good idea to review your financial situation and eligibility requirements throughout the year in case there are strategies you can put in place early.
For further information, or to set up an obligation free appointment with one of our experienced, holistic advisers – contact us today!
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