Advisers may have ‘obligation’ to consider recontribution strategies

While implementing a recontribution strategy will primarily have benefits for the client’s beneficiaries after their death rather than the client, Mr Day said this may be an important factor to consider if the taxation of death benefits is something included in the scope of the advice.

“If you’re holding yourself out as some kind of super estate planning specialist and you’ve said in your marketing materials that you will take into consideration the taxation of benefits paid on death, then do you have an obligation to actually look at that recontribution strategy?” said Mr Day.

Mr Day noted the High Court decision Hill v Van Erp, which looked at negligence in the context of legal advice around estate planning.

“[This decision] involved a will that wasn’t properly executed. The person that missed out on receiving half of the testator's house due to the will not being properly executed sued the lawyer. So there was this question around whether the beneficiaries could actually sue the lawyer in that situation,” he explained.

“What the High Court said was that there was negligence there and that person was impacted by the negligence of the lawyer so therefore they have a right to sue.”

In the context of financial advice, Mr Day said if the adviser has said that they will take into consideration taxation on benefits paid after death, then they may have an obligation to consider a recontribution strategy for a client.

“If you don’t, then could the beneficiaries now potentially sue?” he questioned.

“Could it be even more than that? I would say as a financial adviser you have an obligation to know about the taxation of superannuation including contributions as well as benefit payments including death benefit payments. So if you didn't do the re-contribution strategy and now the beneficiaries are paying a lot in death benefits tax, could there be action taken?”

Mr Day said this would depend on how the adviser has actually talked to the clients about this and how they’ve offered their services.

“That's where you need to talk to lawyers about making sure your service offer is clear,” he stated.

When implementing these strategies, Mr Day said it is also important advisers focus on the outcome rather than the purpose.

“Don't sell any strategy, whether it's a recontribution strategy or something else, on a tax basis, make it all about retirement. As soon as you start to make it about tax and it takes away from retirement, you begin to bring in part IVA and sole purpose issues,” he warned.

Some of the other important considerations with these strategies, he said, are the pension commutation rules, the contribution caps, potential impacts on the age pension and concession cards, CGT, and what to do with the re-contributed amount.