SMSFs told to protect against ‘erratic spending’ of benefits
With the transfer balance cap likely to see greater amounts of money to leave superannuation funds, one SMSF specialist warns this could see reckless spending by younger adult beneficiaries, if appropriate estate planning structures aren’t considered.
Australian Executor Trustees senior technical services manager Julie Steed said the superannuation reforms mean that there is greater need for individuals to look at alternative structures outside of superannuation as a way of paying income streams to their dependants.
SMSF trustees, she said, may want to establish testamentary discretionary trusts in their will, for example, and ensure they’ve got appropriate people appointed as trustees of those trusts, who can not only control not only the tax effectiveness but also control who actually receives the benefit.
“If I’ve got a scenario where I’ve got $4 million in super, and I want that to go to each of my three children, and that’s what my binding death benefit says, then each of those children can get their $1.33 million, but they can each only have a third of the $1.6 million staying in super,” she said.
“So a lot of the time you’ll have scenarios where you might have that amount each and they might be quite sensible and leave their $533,000 as a death benefit pension, but then what’s going to happen to the money that has to come out of the super system?”
While this isn’t usually a problem for younger children under the age of 18 because their legal guardian will control their finances, it could be an issue for younger adults who are 18 for example, she said.
“If $1 million has to come out of the super system then you tend to see erratic spending. In my experience the parents of adolescents, while they’re interested in the tax effectiveness [of their estate planning], they’re far more interested in being in control of their money and making sure that the children can’t make inappropriate choices or choices that the parents rather they didn’t make.”
Establishing a testamentary trust in the will can therefore create peace of mind for the parents, she said.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.