Urgent 30 June estate planning strategies flagged

While not all SMSF estate planning needs to be addressed urgently, certain strategies do need to be reviewed by 30 June in order to avoid adverse outcomes for clients, says an industry lawyer.

Speaking to SMSF Adviser, Cooper Grace Ward Lawyers partner Scott Hay-Bartlem said SMSFs will be structured differently from 1 July 2017 as a result of the transfer balance cap, so certain strategies will therefore need to be adjusted.

“[For example], where you did a brilliant reversionary pension strategy for a client who had an SMSF with one pension to revert to their spouse, if it’s over $1.6 million, from 1 July they’ll have two accounts: a pension, which could still be reversionary if we still do the commutation documents properly; and an accumulation interest,” Mr Hay-Bartlem explained.

“So the existing strategy of using the reversion to get the super over to the spouse is not going to be enough after 1 July.”

Mr Hay-Bartlem said this is due to the fact that the reversion won’t work on the part that’s sitting in the accumulation phase.

“So there is actually some urgency in amending estate planning documents for clients who had particular strategies that will have to change because their fund will look different,” he said.

“Another example is a client I had a few years ago that wanted to leave all of his super to his current spouse but his kids hated the current spouse. So the bulk of his money was in a pension, and he made the pension reversionary to her. When he died the kids [challenged] the estate, but the money in super was immune because it was in super.”

If this same client had died after 1 July this year, however, the super fund would now have a pension of $1.6 million and the balance would be in accumulation phase.

“Only the amount in pension would have gone to the current spouse and the rest would have been up to trustee dissertation which would mean that they didn’t get the result they intended,” he said.

Another example, he said, could be where a client has a pension of $5 million with $1.6 million sitting in pension and $3.4 million in accumulation.

“Now if we did a binding nomination for example that required it all to go to the surviving spouse we may be able to keep $1.6 million in pension phase, but $3.4 million, the amount over the transfer balance cap, will have to leave the fund in all likelihood,” he said.

A binding nomination that forces the money to the surviving spouse, he said, may not be the best answer in this case.

“In a post 2016 Budget environment, it may be that we want to use child pensions in order to get different transfer balance caps for under 18 or under 25 dependent children,” he said.

“If we’ve done binding documents that force it to the spouse, we won’t be able to look at using the other options, and we’re forcing a large amount of money to the spouse. Would we be better off putting it into the estate and using testamentary trusts?”

Mr Hay-Bartlem said some clients with binding documents may find they won’t now have the result they want or they may not be able to take advantage of new opportunities to make things work differently.

“A lot of people put binding documents in place without addressing is there an alternative that might be better. In these days a binding document may in fact lock out other alternatives or better alternatives because of the new rules,” he said.

 

 

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