David Busoli, principal for SMSF Alliance, said death and taxes within superannuation are important issues that must be considered.
“For a member who is over 60, the withdrawal is tax-free, but the death benefit payment, if the beneficiary is not a tax dependent, is reduced by 15 per cent tax on the taxable component, plus Medicare if not paid to the estate,” he said.
However, he said there are solutions for members whose benefits will not pass to tax dependants.
Busoli said one strategy is via a recontribution strategy, which, while highly effective, is not always possible, as the recontribution is subject to the total super balance restrictions applicable to non-concessional contributions.
“For high-balance members, June is the optimal month for such a strategy, as the withdrawal lowers the total super balance that will dictate the level of non-concessional contribution that can be made in July. There are, of course, many members where even this is not enough.”
He continued that the ultimate strategy is for the member to know their date of death in advance and ensure they have withdrawn their benefits by then.
“As silly as this sounds, there are members whose poor health is indicative of a not-too-distant passing if they can bring themselves to consider it.”
“Taking premature action will move the member into a hostile tax environment, but leaving it until the last minute may be too late. Notably, if action is taken, the member needs to be medically capable of giving instructions and the benefit must be paid to the member.”
Busoli continued that a request for a rollout that is not actioned before the member passes is not regarded as a member withdrawal if the trustees of the fund are aware that the member has passed in the interim.
“This will always be the case with an SMSF. As withdrawals and sell downs can take up to 10 days, it’s quite possible that an urgent withdrawal will not be completed until after the member has passed.”
“SMSFs do have the advantage of being able to pay member benefits in specie, so the dates on fully completed documents to enable the transfer of ownership of an asset is regarded as the date of withdrawal – but this is where it can get murky.”
Where investments are held directly by the fund trustees, there is no issue. However, when they are held via an interposed entity, custodian, or wrap, additional paperwork may be required to implement the transfer.
“This additional paperwork is also required before the member passes. Planners would be wise to check the requirements of the platforms they use to ensure this aspect is covered.”
He added that he had recently come across a case where a lawyer advised an SMSF member to leave signed, undated transfer forms covering each SMSF asset in a secure place, where they could be accessed and backdated by a third party after death.
“The implementation of this strategy is as obvious as it is illegal, and I am surprised that a lawyer would place their ability to practice in jeopardy by recommending it.”
“Notwithstanding that sudden, unexpected death leaves no room for adjustment, the existence of a person acting in a trustee capacity under an enduring power of attorney could result in a bulk member payment of assets in specie to the member, prior to the member’s death. This requires several considerations.”
Furthermore, Busoli said, the transfer does not benefit the member. For the attorney to do this without breaching their fiduciary duties, there would need to be suitable conflict clauses within the EPOA document.
“These could also include the ability to implement, vary or renew the member’s binding death benefit nominations.”
“Such an EPOA should be considered in conjunction with the member’s overall estate plan and would generally be crafted at the same time as the member’s will. This should be a collaborative exercise involving all relevant parties including the member’s financial planner, accountant and lawyer.”
