Colonial First State executive manager Craig Day said the rules around child death benefit pensions are very complex and the amount of money that a child will be able to receive from a death benefit pension will not necessarily be the full $1.6 million that a spouse would be able to receive.
“Some people are looking at the complexity of those rules and saying, ‘you know what, if we're going to pay any of this death benefit to a child, let's actually just think about getting it straight out to a testamentary trust, rather than trying to have amounts being paid as pensions’,” said Mr Day.
“You see pretty quickly when you start to apply these rules that the cap increment amounts, or the modified transfer balance account for children, actually gets reduced by any death benefits paid to parents and as a result, depending on the level of death benefits coming out, you may end up with quite a lot of benefits needing to leave the superannuation system.”
A lot of SMSF professionals are therefore deciding, he said, that if they have to engage lawyers to set up testamentary trusts for the amounts that have to come out of the system anyway, it may be a simpler outcome to just use testamentary trusts for the whole amount.
Mr Day said this does depend on the level of benefits coming out, however, because if there are benefits going into a testamentary trust, then each child beneficiary will be entitled to income up to the tax-free threshold, taxed at adult tax rates.
“So moving superannuation benefits out of the superannuation environment and into a testamentary trust may provide you with significant benefits anyway, and you avoid a lot of the complexity with the child death benefit pension rules,” he explained.
He also highlighted that child death benefit pension will always need to be commuted out of the fund at age 25 as lump sums, unless the child is disabled.
“Having a testamentary trust may give you a greater degree of control to say ‘well actually I don't want large amounts of benefits going to my child when they turn 25, I would prefer it as 28-30, when I think they're better able to deal with it’,” she said.
“So having a testamentary trust can potentially give you a bit more flexibility there in terms of when child beneficiaries become entitled to a capital distribution.”