OPTIMISING DEATH BENEFITS & SUPER
Promoted by Accounting & Adviser Services.
With the recent changes made to super, it is now more important then ever that Advisers and Trustees properly plan and manage their estate planning requirements inside super. In particular they should ensure that members have proper Death Benefit Agreements (i.e. Binding Non Lapsing Death Benefit Agreements) in place.
The reason for this, is that without a proper Death Benefit Agreement, if a member dies their money in super must be paid out of super as soon as practically possible (the ATO guidance is six months) to the deceased members estate. This becomes particular problematic if the fund has illiquid assets such as properly.
The only way to keep this money inside super with out trying to recontribute the money back in to super (which can be difficult given the restrictions on making contributions) is to have a valid Death Benefit Agreement or Reversionary pension in place.
However even with a valid death benefit or reversionary pension in place, the surviving member will only be able to keep the money inside super if their “Transfer Balance Account” (TBA) is less than $1.6 million.
For example, if a member already has a pension and TBA of $600K and then subsequently receives a death benefit pension of $1,100K, they will be over the cap as the total will be $1.7 million. As a result, $100K would need to be transferred out of super. Effectively when a member dies, their transfer balance cap dies with them.
With a valid Death Benefit Agreement or Reversionary pension, the issue of managing the TBA for a surviving member is much simpler. The reason being that with a Death Benefit Agreement or Reversionary Pension Trustees have 12 months from the date of death to make the payment to the surviving spouse.
During this time, the surviving spouse can roll back their pension into their accumulation account and thereby reduce their TBA.
Using the example above, the surviving member who is set to receive a death benefit payment of $1,100 K could rollover back $500K form their pension account, (reducing their TBA by $500K) and as a result ensure the combined pension and TBA would be under $1.6 million. This would then mean that all the money is kept in super as they will have $1.600 K in pension and $100K in accumulation.
Note that it is important that Trustees remember that whilst the Death Benefit Pension or Reversionary pension it still needs to meet the minimum pension payments to remain compliant prior to transferring this amount to the surviving member.
For this reason going forward it is increasingly becoming important that Adviser and Trustees have valid Death Benefit Agreements in place for all members or reversionary pensions.
Trustees and Adviser should also carefully check their Trust Deeds to ensure that it allows members to have Binding Non Lapsing Death Benefits or Death Benefit Agreements, as many old Trust Deeds particular those prior to 2011 don’t allow for this provision. If this is the case then Trustees and Adviser should update their Deeds