SMSF Estate Planning under the new reforms

Estate PlanningSMSF InsightsUnderstanding SMSFs

SMSF Estate Planning under the new reforms

From 1 July 2017, the introduction of the transfer balance cap (TBC) impacted the amount of capital that an individual could use to support an income stream in retirement phase.

The TBC also applies to death benefit income streams and therefore changes the way we must think about estate planning.

With the introduction of the TBC changing the way SMSF estate planning works, the need for SMSF Specialist advice is more important than ever. Briefly, the changes will now force amounts of superannuation to leave the system, earlier and larger than in the past, upon the death of a member. Therefore, members must have an estate plan set up early to ensure their death benefits go where they intend.

Transfer Balance Cap changing SMSF estate planning

From 1 July 2017, the TBC will limit how much a member can have in retirement phase over their lifetime. For the 2017/18 financial year the TBC is $1.6m. Where a member dies, their transfer balance account dies with them. In essence, a deceased member’s transfer balance account is not inherited by a dependant or a surviving spouse.

When a member dies, the trustee of an SMSF is required to ‘cash’ the deceased member’s remaining superannuation entitlements (i.e. death benefits) as soon as practicable after the member’s date of death. 

Where a deceased member’s benefits are cashed as a lump sum, there is no impact on anyone’s TBC. Where a deceased member’s benefits are cashed as a death benefit pension, there will be an impact on the recipient beneficiary’s TBC.

In all circumstances, a death benefit pension can only be paid to the extent that it does not cause the dependant to exceed their own TBC. Where the death benefit does cause the recipient to exceed their TBC, the recipient will have an excess amount.

Any excess death benefit must be paid as a lump sum death benefit and cannot be retained within the superannuation environment.

Therefore, careful planning is required to ensure that excess TBC issues do not occur and that if money must leave superannuation, it is dealt with by the SMSFs governing documents.

There are two strategies which can help reduce the impact of the TBC on death. One of these include early rebalancing of funds so each member is able to maximize their own $1.6 million.

The second occurs on death and involves a full or partial rolling back of a beneficiary’s own pension which will give rise to a ‘debit’ in their own transfer balance account. This frees up the required cap space for them to receive a death benefit pension.

We would encourage you and all the members of your fund to speak with your SMSF Specialists and advisors to enable planning for any excess TBC issues.

Who your death benefits can go to

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