Speaking to SMSF Adviser, Townsends Business & Corporate Lawyers Michael Hallinan said there is some debate in the industry regarding a technical issue with strategies where the pension is paid to the spouse but on the death of the spouse, the account balance goes back to the children of the original pensioner.
“[So] the pension is payable to the primary beneficiary, he dies, it transfers to the second wife, and the intention is that upon her death the balance is to go back to the children of the primary beneficiary,” Mr Hallinan explained.
“Some people think there’s a technical issue as to whether the children of the primary beneficiary are in fact SIS dependants of the second wife, and if they aren’t, then how can the benefit transfer back to the children of the primary beneficiary?”
The other way of looking at the issue, he said, is that the benefit always remains the benefit of the primary beneficiary and his children are SIS dependants of the primary beneficiary.
“It’s a technical issue and people have different views. Personally, I think depending on the terms, it doesn’t necessarily become the benefit of B, it always remains the benefit of A, and therefore the children of A are entitled to be paid that benefit, albeit most likely as lump sums,” he said.
Cannot see anywhere in superannuation law where a life interest satisfies the definition of “cashing”.
The only way the children of a former relationship could be guaranteed to receive the capital is if the death benefit is paid to the estate and held under a testamentary trust that has 2 classes of beneficiaries. The problem with that strategy is that if the children are adults or not dependent, you could have the trustee paying tax on receipt of the capital. It’s usually a trade off between which objective is more important – the tax savings versus the placement of capital.
As Michael stated the debate on this issue has gone on for some time. I am bewildered that someone has not presented a definitive answer.
Anyway something to be wary of when reducing death benefit pensions to the 1.6m cap.