Life interest pensions could see estate planning ‘trainwrecks’
An industry lawyer has warned SMSF practitioners to exercise caution when recommending life interest pensions (LIPs) since there is no express ATO guidance and doing so could lead to litigation.
DBA Lawyers director Daniel Butler told SMSF Adviser the main idea behind LIPs is that the second spouse of the deceased gets paid a pension until that spouse dies, and then the remainder of the pension goes to the children of the deceased’s first relationship.
“The question is whether it is compliant with the regulations,” said Mr Butler. “We don’t have any express ATO approval on that, but people are entering into this at the moment in the marketplace.”
Life interest pensions often do not stack up from an estate planning perspective, he added.
“People who think these life interest pensions are going to work are really betting on the second spouse, for example, doing the right thing by the kids from the former relationship,” said Mr Butler.
“There are just so many trainwrecks waiting to happen.”
The litigation issues are therefore significant since LIPs “rely on a lot of faith, faith that they’re going to work”.
One of the main things that remains unclear is whether payment, on the death of the second spouse, to the children of the first relationship is actually allowed, he said.
“Are the former children dependants? Is it a legitimate payment?” Mr Butler asked.
Some of the people setting up or offering LIPs have not had much experience either, he added.
“I think people should be aware that life interest pensions are not a proven commodity and they should be aware of the risks involved,” he said.
“The people that are setting up these LIPs are saying, ‘hey, it all works’ and placebo clients think they’re happy until the day of reckoning comes.”
SMSF trustees considering this option should only deal with someone who is covered by professional indemnity insurance to advise on life insurance pensions, he said.