Estate Planning Equation director Allan Swan says where the ownership of a life insurance policy is in a superannuation fund, SMSF practitioners need to think carefully about its tax ramifications.
“If we have life insurance that flows via a superannuation fund and out as death benefits, and it’s paid as a pension to say a surviving spouse, we don’t have adverse tax ramifications,” Mr Swan said.
In situations where it is paid to an estate and goes to a surviving spouse and young children, there are also no significant tax ramifications.
“[However], if it goes to non-dependants, non-dependants for tax purposes or it gets paid to a testamentary trust that includes non-independents, the ATO gets a 15 per cent death benefits tax by virtue of it being paid to the non-dependant, plus a 15 per cent surcharge because it’s coming out as an untaxed amount, plus any levies that might be applicable,” Mr Swan said.
“So we’ll see a tax bill of 34 per cent on life insurance coming via super being paid into an estate or being paid into a testamentary trust that includes say grandchildren, nieces and nephews – too wider class of beneficiaries.”
If a testamentary trust is being used and a super fund is involved, Mr Swan said SMSF practitioners should advise their clients to limit that to people who are death benefit dependant for the purposes of the Tax Act to ensure there is no taxation problem.
Typically, death benefit dependants are a surviving spouse and/or children who are either still minors or are still financially dependent or in an interdependency relationship.
“So if they fall into any or those categories, then the trust is limited to just those beneficiaries and can’t be widened, then we’ve got a trust that won’t expose people to death benefits tax,” Mr Swan said.
“There’s effectively a 30 per cent levy rate applying to life insurance funded death benefits. We’re talking about a very high tax rate historically, in terms of death duties.”