Impact of Superannuation Reforms on Estate Planning
The Federal Government has announced changes to superannuation from 1 July 2017 that will affect many individuals. As we draw closer to 1 July, more and more people are seeking advice on how the changes will affect them and specifically, what the changes mean to their existing wills and estate plans.
The Federal Government has imposed a $1.6 million balance cap on the total amount that a member can transfer into a tax-free pension phase account from 1 July 2017. This will mean that from 1 July, many members will need to transfer a significant portion of their superannuation benefits into accumulation phase, which will attract the superannuation 15% tax on income generated within the fund, including capital gains.
How will the member’s family and their estate be impacted when the member dies? Consider the situation where a husband and wife each have $2 million in pension phase. The husband and wife each execute binding death benefit nominations to leave their super to the other. The husband subsequently dies.
Traditionally, the wife could maintain the benefits within the superannuation environment by commencing a death benefit pension and subsequently commuting the pension (after the relevant period of time, known as the 3 month/6 month rule, and provided the super fund deed permitted this to take place).
From 1 July however, things will need to change. The following would need to occur:
- During their lifetimes, the husband and wife would each need to wind back $400,000 from their pension accounts into their accumulation accounts, thereby holding no more than $1.6million within the pension phase
On the death of the husband:
- The wife would need to wind back $1.6 million from her own pension account into accumulation, thereby holding $2 million in accumulation phase;
- The wife could then commence (or receive a reversionary pension) from the deceased husbands pension account to the value of $1.6 million; and
- The husbands remaining $400,000 held in his accumulation would need to be withdrawn or ‘cashed out’ from the superannuation environment
Once the funds are out of the superannuation environment, contribution limits and the ‘work test’ may prevent the wife’s ability to recontribute funds back into superannuation.
Auto-reversionary pensions offer some relief and flexibility by not causing a debit to the recipients transfer balance account until 12 months after the death of the member. As a result, a reversionary pensioner has 12 months decide whether to cash out their pension or retain it.
The estate planning issue is then where should this lump sum withdrawal be paid. It will be necessary to review and update estate plans including Wills and binding death benefit nominations in light of these changes:
- if funds are required to be cashed out from the superannuation environment, this might impact a family’s overall distribution of their estate and undo estate planning strategies previously put in place;
- binding death benefit nominations may need to be reviewed and amended as they may no longer be appropriate in light of the recent changes;
- binding death benefit nominations may need to be limited to ensure the surviving spouse’s transfer balance cap is not affected. Particular care needs to be taken when drafting binding death benefit nominations in light of recent case law;
- In the case of second marriages where superannuation may have been used as an estate planning tool to provide for the spouse, this arrangement may need to be unwound and an alternate arrangement considered;
- Superannuation trust deeds may require review and amendment to ensure there is maximum flexibility including the ability to execute (non-lapsing) binding death benefit nominations, and auto-reversionary pensions.
Make sure you get your estate affairs in order before the changes arrive on 1 July 2017.