We all think it will never happen to us, and that we are invincible. But the reality is that at some stage or another we will be faced with the death of a loved one and dealing with their financial affairs.
Planning for the distribution of your superannuation assets after your passing involves careful consideration and strategic decision-making. Understanding the nuances of super withdrawals preceding death is crucial to optimising tax implications and ensuring your beneficiaries receive the maximum benefit.
If you are an older Australian who:
· no longer have a spouse or financial dependant(s) to receive tax free death
benefits; or
· wishes to leave their super to someone who is not a dependant.
Navigating super withdrawals for estate planning requires careful consideration of tax implications, regulatory requirements, and individual circumstances. By understanding the nuances of this process, clients can optimise outcomes for your beneficiaries and secure their financial legacy effectively.
Timing and Strategy
The timing of super withdrawals before death can significantly impact tax liabilities and estate planning outcomes. Recent guidance from the Australian Taxation Office (ATO) sheds light on alternative strategies to enhance these outcomes. For clients and their families, particularly those without spouses or financial dependents, navigating this terrain can be complex yet rewarding.
Optimizing Outcomes
For clients in such situations, exploring the appropriateness of withdrawing their super balance before death becomes paramount. This strategy aims to manage taxes effectively and maximise the amount received by non-tax dependent beneficiaries, typically adult children. When executed correctly, these withdrawals are received as tax-free member benefits, eventually forming part of the estate as per the individual's Will.
Challenges and Considerations
However, challenges may arise, especially when dealing with tight timeframes due to the imminent passing of the client. One such issue is determining the nature of the payment if the client passes away before the withdrawal is processed. Is it considered a death benefit or a member benefit, and what are the associated tax and legal implications?
Understanding Tax Implications
From a tax perspective, member benefits paid from super are tax-free under specific circumstances, such as terminal illness or for individuals over 60 from taxed funds. On the other hand, death benefit lump sums paid to non-tax dependents incur taxes of up to 17% on the taxable component and up to 32% on any untaxed component, which may include life insurance proceeds.
ATO Guidance
The ATO's stance on this matter has evolved over time. While past private binding rulings (PBRs) provided some clarity, recent updates emphasise the importance of trustee awareness regarding the member's death at the time of benefit approval. This distinction between member benefits and death benefits holds significant implications for taxation and estate planning.
Practical Considerations
In practice, whether a benefit is treated as a member benefit or a death benefit depends on various factors, including the awareness of the trustee regarding the member's death. For Self-Managed Superannuation Funds (SMSFs), where members often serve as trustees or directors of corporate trustees, immediate knowledge of a member's death is presumed. Conversely, APRA-regulated funds become aware of a member's death only upon notification.
It is essential in our role as advisers, to ensure that these above considerations are communicate effectively with clients and relevant authorities to avoid the pitfall of death bed withdrawals and ensure your wishes are met with the least amount of tax and legislative implications upon yours or your family members death.
Comentarios