Is your estate plan up to date with the new super rules?

Superannuation and estate planning are both delicate issues, but the recent super reforms have increased their complexity and may impact even the most carefully considered of estate plan.

Many people have not yet considered or documented their wishes for passing on their super to their loved ones. In light of the new rules, now is an opportune time to review or establish an estate plan. At the same time, the reforms—including the application of a $1.6 million transfer balance cap—also provide potential for benefits to leave the super environment sooner than previously anticipated. And we can help you navigate the strategies that best align with your wishes.

Passing on your super under the new rules

Contrary to popular belief, superannuation benefits do not automatically form part of your estate to be distributed in accordance with your will. When a member dies, their super benefits must be paid to an eligible beneficiary as a lump sum or pension, and cannot be transferred to the beneficiary’s accumulation account.  In this article, we consider a number of estate planning options and how they could provide greater certainty for the distribution of your benefits.

It’s important to review your estate plan on a regular basis to ensure that your assets are directed to your intended beneficiaries or estate in accordance with your wishes. If you hold a self managed superannuation fund (SMSF), you can achieve this via a binding death benefit nomination (BDBN) form, a reversionary pension election or the actual SMSF deed. It is therefore important as members to ensure you have an up-to-date BDBN and/or will that reflect your current wishes. 

Firstly, lets explain the terms and their implications under the new rules.

  1. Binding death benefit nominations
    A BDBN is often called a ‘will for your super’. It allows a member to nominate a beneficiary or beneficiaries to receive their super benefits directly from their SMSF in the event of their passing. Superannuation law only permits people within certain categories to receive the deceased member’s benefits directly from the fund – these include the member’s spouse (including a de facto), child, any person with whom they have an interdependency relationship, any financial dependants and their legal personal representative (executor/administrator of the estate). In the case of the latter, the superannuation benefits will be distributed to beneficiaries in accordance with the member’s will.

    If there is no valid BDBN when that member dies, the remaining SMSF trustee may exercise their discretion to determine the ultimate recipient of the super benefits, subject to provisions of the SMSF trust deed. It is possible that the person who becomes the trustee and gains control of the SMSF may choose to pay the benefits directly to themselves (if they are an eligible beneficiary) and not to the preferred beneficiaries (who may or may not be mentioned in the will).
  2. Reversionary pensions
    A reversionary pension election is another estate planning option that may be available to members with an existing pension or who are about to commence a new pension. It allows a limited selection of beneficiaries (usually a spouse) to automatically continue receiving the pension in the event of the member’s death – providing certainty as to whom the benefit is paid, the form in which it is paid, possible retention of Centrelink grandfathering provisions and additional time (up to 12 months) to seek advice in relation to the restructure of fund assets and benefits (if required). However, it is generally a less flexible option compared to BDBN and not available for accumulation accounts.

Prior to 1 July 2017, it was common for members to nominate their spouse to receive all of their super benefits as a pension. With no limits on the amount the surviving spouse could receive as a pension and retain within the super environment, this type of nomination could be easily accommodated – many family succession plans were based on the assumption that all of a couple’s superannuation benefits would be able to stay in the super environment until the death of the second spouse.

However, the 1 July super reforms capped the pension amounts an individual can now hold in super, including pensions received on the death of a spouse. Generally, this means that no more than $1.6 million (subject to periodical indexation) can pass to the surviving spouse without breaching their transfer balance cap. Death benefit amounts that exceed this limit will be subject to penalty tax and must be withdrawn from super.

One size does not fit all in this new world of super

This new environment requires you to identify who you would like to pass your benefits on to, and how. With many people having different family circumstances and super fund compositions, there is no ’one size fits all’ approach to estate planning.

We recommend that all SMSF members take time now to review their current BDBNs, reversionary nominations and wills and consider the following issues:

  1. Have you completed a valid BDBN for your SMSF?
  2. Who do you want to pass your superannuation benefits to?
  3. Is your nominated person an eligible beneficiary (as listed above)?
  4. Do you want your surviving spouse to receive some or all of your superannuation benefits?
    a) Will your benefits cause your spouse to exceed their transfer balance cap?
    b) If they do exceed their transfer balance cap, do you want them to withdraw the excess amount from super as a lump sum or are there other beneficiaries you would like to make provision for at this time?
    c) Will your benefits cause your spouse to lose their eligibility to the Age Pension or Commonwealth Seniors Health Card?
    d) If you have an existing pension, will your spouse benefit from a reversionary nomination?
  5. If you do not want your spouse to withdraw funds into their own name or you don’t have a spouse, have you considered asset protection, tax effective options to manage investment income and death benefits tax implications?

Consider the structure that’s right for you

As always, when reviewing your estate plan, don’t forget to also review the circumstances of your family members (i.e. surviving spouse or children from a previous relationship) who have a reasonable expectation of inheriting from you. Have you considered the amount and kind of provisions they might require?

It is also important to consider the appropriate structure for passing your estate to intended beneficiaries. For example, wills often establish testamentary discretionary trusts for different purposes, such as:

  • asset protection for vulnerable beneficiaries – a well drafted testamentary trust can protect your estate from a beneficiary’s creditors, or from a spendthrift beneficiary
  • managing income – a testamentary trust may allow income generated on inherited assets held inside the trust to be shared between different family members, potentially providing significant taxation savings.

Given the complexity of the topics and the super reforms, we recommend you review your BDBN and reversionary pensions (if applicable) and ensure they work together with your will.

There may also now be planning opportunities available that enable a spouse to maximise the amount retained within the super environment and we recommend you seek appropriate advice – our strategy advisers and our estate planning lawyers can assist you through this process. 

This article contains general information only and should not be considered financial advice.  Seeking personal financial advice is always highly recommended.

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Dixon Advisory

Dixon Advisory is a holistic family wealth management firm supporting over 8,000 Australian members to manage their wealth for retirement through self managed super funds (SMSFs).

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