A technical trap in legislation released this year is placing SMSF trustees with reversionary TRISs at risk of either breaching the SIS death benefit cashing rules or facing adverse estate planning outcomes, warns a technical expert.
Colonial First State executive manager Craig Day said in late June the government introduced new rules to allow transition to retirement (TTR) pensions to convert to retirement phase where a member has satisfied a condition of release.
“Now those conditions of release were actually specified to only include [turning] age 65, as well as retirement, permanent incapacity, and terminal illness, but funnily enough, it didn't include death,” said Mr Day.
What this means, he said, is that where someone has a reversionary TTR pension, upon their death the beneficiary will need to be assessed in order to determine whether they satisfy one of those conditions of release.
The reason for this, he explained, is that the super reforms also amended the cashing rules for death benefits.
“What the cashing rules now say is that a death benefit can only be paid as a lump sum or as a pension that’s in retirement phase,” he said.
What normally happens is that a reversionary pension will continue on the death of the original member, but if the beneficiary hasn’t met one of those specified conditions of release this can’t occur as the TTR pension would not be in the retirement phase, he said.
“What this technically means is that the reversionary nomination would be invalid as the trustee would not be permitted to continue to pay the pension under the death benefit rules.”
In this case, the beneficiary may have the option of taking the death benefit as a lump sum or as a new retirement phase income stream, such as an account based pension, so it may not seem like a big deal, said Mr Day.
“However, what's really important to understand is that if the reversionary nomination fails, the fund's governing rules kick in to prescribe how the trustee must pay the death benefit.”
For example, in this case the fund’s deed may grant the trustee the power to exercise their discretion in relation to the payment of the death benefit.
“Now if the person you nominated as a reversionary beneficiary also the surviving trustee, then that may be fine because they can then make the decision to pay the death benefit to themselves as an account based pension,” said Mr Day.
However, where the reversionary is not a trustee of the fund, the outcomes may not be as desirable he warned. In this case, the trustee could exercise their discretion to pay the death benefit to the member’s other SIS dependant beneficiaries.
It’s just like in the case of an invalid binding death benefit nomination, whoever is left in control of the fund is going to get to call the shots. And if that someone isn’t inclined to want to pay anything to the reversionary beneficiary, such as an adult child from a previous relationship, then all may not end well.
“So it will be really important for members with reversionary TTR income streams to review their estate planning arrangements and to update them where required. This could include revoking a reversionary nomination and replacing it with a binding death benefit nomination where the person nominated as a reversionary hasn’t satisfied one of the specified conditions of release’.
However, Mr Day warned that SMSF trustees should seek legal advice to confirm this is possible under the fund’s governing rules. Alternatively, a member could just stop and restart their pension, however that would come with additional administrative hassle and cost.
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