Tax, estate planning considerations in benefit payouts
Lump sum death benefit payouts can cause significant issues for SMSF trustees whose spouse has passed away, both from a tax and estate planning perspective, according to a leading accounting firm.
HLB Mann Judd Sydney wealth management partner Michael Hutton said the issue of lump-sum payouts had been affecting many of the firm’s clients since the imposition of the transfer balance cap rules, particularly those trustees who may have been reliant on their spouse when it came to management of the family finances.
“Taking that lump sum out of the super system is problematic for people because it brings it into a taxed environment where they will have to pay tax at the going rate for any earnings on that amount,” Mr Hutton said.
“Often this would happen when people are quite old and they are going to have to reconfigure their financial affairs at an advanced age, which can be a bit traumatic for them.”
Mr Hutton said the firm often recommended other low-tax vehicles for trustees to continue investing a lump sum, rather than gifting to other generations of the family.
“Investing it can be done through a family trust or in their own name — perhaps they would want to give some money to the kids, but we would talk through that with them,” he said.
“My first advice to people is to make sure they look after themselves financially before they look at providing extra funds to potential beneficiaries, because they don’t want to run out of money and become a financial burden.”
Mr Hutton added that there were also estate planning considerations when looking at how to distribute lump sums, as gifting amounts to some siblings in the family and not others could cause family conflicts.
“When there is a sudden lump of money that turns up, it might be done happily, but there might be a bit of pressure brought to bear by kids to get a bit of the inheritance sooner,” he said.
“We would recommend they put a loan agreement in place if they are to give some money to one child but not another, and look at the estate planning to see if things could be equalised upon that person’s death.”