2 Disclaimer Please note that this presentation is to be considered general advice only. The material and the opinions of the presenter should not be relied upon to make decisions. To do that you should obtain specific advice where you make the facts clear and the advisor is aware that you are clearly going to make decisions based on what is said
3 Agenda Estate Planning and SMSFs Taxation of Death Benefits Reversionary Pensions Control Trustee Issues Death Benefit Nominations Reserves Life Insurance
4 Estate Planning & SMSFs Interest in superannuation NOT part of the deceased s estate; Trustee of superfund decides, unless a valid binding death benefit nomination in place; Executor and remaining members make the decisions; Member beneficiary nomination can specify individuals, or their estate;
5 Death Possible for will to nominate a LPR to act as director of Trustee company; Decisions by trustees of SMSFs no subject to SCT Katz v Grossman valid discretion exercised despite unfair treatment Benefit can be paid as a lump sum or a pension (deed permitting)
6 Taxation of death benefits
7 Taxation of Lump Sum Death Benefits Pre 1 July 2007, taxed fund Tax dependent, includes spouse, children under 18years, and other financially dependent, and disabled children Up to the deceased s remaining PRBL: nil Excessive components: Post 83 taxed element: 39.5% Pre 83 taxed and all untaxed elements: 48.5% Non-tax dependent Up to deceased s remaining PRBL: Post 83 taxed element %, untaxed element 31.5% Pre 83 MTR plus Medicare Levy Excessive component: Post % Pre %
8 Taxation of Lump Sum Death Benefits Post 1 July 2007, taxed fund Tax Dependent Nil Non Tax Dependent Tax free component* nil; Element taxed 16.5% Element untaxed 31.5% * Tax Free component comprises undeducted contributions and pre 83 amounts.
9 Taxation of Pension Death Benefits Pre 1 July 2007 (pension to tax or non-tax dependant) Non-excessive reversionary / fresh income stream [(Benefit payment deductible amount) x MTR] 15% rebate Excessive reversionary / fresh pension (Benefit payment deductible amount) x MTR Post 30 June 2007 from a taxed fund Primary Beneficiary (PB) < 60 years and Reversionary Beneficiary (RB) < 60 years [(Benefit payment exempt amount) x MTR] 15% rebate PB < 60 & RB > 60 - nil PB > 60, RB any age - nil
10 Taxation of Pension Death Benefits Post 30 June 2007 from an untaxed fund Primary Beneficiary (PB) < 60 years and Reversionary Beneficiary (RB) < 60 years [(Benefit payment exempt amount) x MTR] PB < 60 & RB > 60 or PB > 60, RB any age [(Benefit payment exempt amount) x MTR] 10%rebate
11 Control Trustee Issues
12 Control Trustee Issues Executor or LPR take over role of deceased; If surviving spouse, then she has 100% control; If intention was to leave part of balance to children of earlier marriage this may not be achieved; If children under 18 years and their LPR appointed trustee may end with current spouse and ex spouse managing the fund
13 Control Trustee Issues Consider separate SMSF for children of first marriage Trustee company shareholders have the power to remove a director Remaining spouse may inherit the deceased share and then has ability to remove other directors; Needs to be addressed in the members will
14 Reversionary Pensions
15 Reversionary Pensions A pension that reverts to another person on the death on the primary beneficiary Age of the younger of the primary and reversionary pensioner used in the calculations of pension payments
16 Reversionary Pensions Pension commenced before 1 July 2007 Pension may revert under current rules An allocated pension can revert to multiple dependents; A market linked pension con only revert one at a time; Tested for RBL once only at time pension commenced for primary beneficiary If no reversionary pensioner, pension ceases on death and fund no longer tax exempt, CGT will apply to asset disposals Nominated at time of commencement of pension, although there is a view that if the deed permits, can revert on death and not be considered a new pension
17 Reversionary Pensions From 1 July 2007 Pensioner dies on or after 1 July 2007 Irrespective of when pension commenced Can only revert to a tax dependent To a child only if: Under 18 years, but must commute at 25 Between 18 and 25 if financially dependent on pensioner, but must commute at 25 To a child suffering a permanent disability
18 Reversionary Pensions From 1 July 2007 breach of pension standards if existing pension rules provide for reversion to non tax dependents Existing pension docs needed to be reviewed; If breach the standards pension is taxed at ordinary income; fund is non complying auditor must issue qualified audit report and notify regulator
19 Death Benefit Nominations
20 Death Benefit Nominations Estate or beneficiary? Estate Executor of will then distributes in accordance with the will; If in pension phase reversionary pension will not be included Lost ability to establish a pension for a minor Taxation benefits greater post 30 June 07 for minors» Tax free pension up to 18 year, or 25 years if financially dependent compared to $6,000 tax free. Non binding Trustee determines, taking into account the members wishes as shown in the nomination
21 Death Benefit Nominations The deed must allow for Binding death benefit nominations for SMSFs s58 excludes SMSFs from the 3 year rule; can potentially make lifetime DBN Member determines receipt of death benefits (s 59(1A) Not binding if contrary to Family Court order No requirement for fund to offer BDN Consequences must have been explained Not automatically revoked by divorce Should cover contingencies A financial Enduring Power of attorney should include the power to confirm a BDN
23 Reserves What is a reserve? Amount held within a fund that is not allocated to a member Allowable unless specifically prohibited in the trust deed Specify type and purpose How do they work? Allocated from investment returns; or In accordance with actuarial requirements Taxed at super fund rate Not a pension asset Must have own investment strategy
24 Reserves Types of Reserves Contribution Investment Solvency Miscellaneous S279d (Anti Detriment payment) Part IVA application? Ryan s case? On notice of extended application of Part IVA and retrospective application Allocation of reserves prior to 30 June?
25 Contributions Reserve Contributions not allocated to members Large funds, not applicable for SMSFs Was a surcharge and RBL strategy 2004 Budget contributions must be allocated within 28 days Existing reserves can remain, no time limit.
26 Investment Reserves Smooth returns Assisted with Term Allocated Pensions to make payments within +/- 10% post 1 Jan 2006 RBL Strategies Unnecessary after 1 July 07 Centrelink strategy Keep member balances down Mature age and partner allowance entitlements Limitations SCR 99/1 investment reserve limited 15% Application to surcharge amounts; application post 30 June 07?
27 Solvency Reserves Required by actuary to guarantee payment of defined benefit pensions Separate pools of assets Not used to back pension Tax on income and gains Allocation back to pension pool At discretion of actuary Still relevant Existing lifetime and life expectancy pensions
28 Solvency Reserves What happens on death? Lifetime pension with guaranteed period & Fixed term pension NPV of remaining payments death benefit; Unused pool of assets plus solvency reserve transferred into a miscellaneous reserve Allocate to other members? Payout as an anti-detriment payment? Lifetime pension outside of guaranteed period Unused pool of assets plus solvency reserve transferred to miscellaneous reserve. Single member fund No ability to bring members in to benefit from the reserve ATO takes miscellaneous reserve If LPR can act to admit new members deed to will important
29 s279d reserves S 279D anti detriment following introduction of 15% tax on contributions Payable to dependents on death of member Amount equivalent to 15% tax paid on contributions Must be paid, and must be in addition to member s balance on death Tax deduction for super fund Payment / 15% Cary forward losses? Only beneficial if remaining members
30 s279d reserves Question is how to fund the payment Specific Life insurance Deed must allow Documentation to support purpose Establish a reserve Excess investment returns Allocation from miscellaneous reserve Must be established prior to death
31 Life Insurance
32 Life Insurance Up to 30 June 2007, insurance inside fund used to top up balance to RBL levels Post 30 June 2007 Removal of RBL means no cap Premiums for life and TPD insurance tax deductible for super fund not for individual
33 Life Insurance Permanent incapacity Ceased gainful employment Post 30 June 07 will include self employed Care with definitions SIS Act permanent incapacity condition of release Insurance cover unlikely because of physical or mental ill-health ever again to engage in gainful employment for which the client is reasonably qualified by education, training or experience May end up with insurance payout stuck inside fund as SIS condition of release not met.
34 Life Insurance Taxation Tax exempt proportion remains tax exempt Taxable components further divided into Element taxed taxed at 15% to non tax dependants Element untaxed taxed at 30% to non tax dependants Where a deduction has been claimed for the premiums
35 Life Insurance Member Balance at death, before insurance proceeds Insurance cover Tax Free proportion Age service period commenced Age at death Last retirement day Superannuation lump sum Tax Free component - Element Taxed - Element Untaxed Tax payable Net After Tax Lump Sum 250,000 1,000,000 10% ,250, , , , , ,063
36 Conclusion Estate planning needs to include SMSF Trust Deed must always be reviewed in the estate planning process BDNs are appropriate in certain circumstances only Insurance may be appropriate but not always & be mindful of tax Consideration as to control of the fund after death important Reserves may be used for intergenerational wealth transfer
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