Pitcher Partners superannuation expert Tracey Norris said that estate planning, particularly in relation to superannuation, continues to be very complicated for a lot of clients, and that some haven’t even thought about it.
“I would say about 80 per cent of our clients think that their last will and testament will take care of how their superannuation benefits are distributed, but the reality is that it can’t,” she said.
Ms Norris said given the changes to the superannuation laws, including the introduction of the transfer balance cap, clients need to look at what impact this might have on their estate planning, particularly where they have large amounts in super.
Failing to take the transfer balance cap into account could be very expensive, said Ms Norris.
“People can no longer expect their superannuation to simply track along without strategic thinking about how to work with the new limits,” she explained.
Under the transfer balance cap, there is a limit of $1.6 million on the assets that can be transferred in superannuation from an accumulation account to tax-free retirement-phase accounts.
“Amounts above that cap can remain in accumulation phase during an individual’s lifetime but will normally need to be taken out of superannuation after the death of the member and may be treated as taxable benefit payments, with the potential for capital gains tax or stamp duty to also apply.”
Ms Norris gave an example of a couple where the husband passes away, leaving an SMSF worth $1.2 million, including an $800,000 property.
“While the husband might have intended in his will that all these assets pass directly to his wife as a death benefit pension, unless she has a sufficient transfer balance cap, she will need to receive some of those assets as a death benefit lump sum instead,” she explained.
“If the lump sum includes the property, the wife must either pay the stamp duty to transfer the property entirely to her name — about $30,000 in this example — or sell it and pay whatever capital gains tax liability is incurred.”
The tax liability would be even greater if the assets pass to the man’s adult children instead, she noted.
“In this case, the children could expect to have to pay tax on any taxable component of the bequest, which might be a tax bill in the hundreds of thousands,” she warned.
“There are a lot of legal and strategic issues around superannuation, for example, how to direct the trustee, who the beneficiary is, and how to understand the potential tax outcomes for the recipient beneficiary.”
Another factor to consider with estate planning is timing, she said.
“You may have as little as six months to liquidate assets and pay out any liability,” Ms Norris said.
“When people are grieving, that is the very last thing they want to think about.”
SMSF Estate Planning is an art form and sadly BDBNs dont cut it anymore. Look at Donovan, Katz and Munro’s case to see the problems. In fact a smart SMSF litigator could have sued the lawyers, accountants and auditors for setting up pass through of super to an estate that did not work. And here’s a hint, if you are not doing bloodline SMSF planning you are way behind the curve.