When I was 14, my grandfather who was 91, transferred his share of the family farm to my uncle and father, who then had to pay gift duty on the value of the gift.
They figured that was better than the cost of death duty once my grandfather died.Unfortunately, grandfather, an avid cricket fan, needed to bat on a bit longer because he didn’t last the three years needed to avoid death duty.
So a lovely piece of grazing country had to be sold, as my family simply could not find the money needed to pay the death duty.
Death duties are abolished but remains by another name, where superannuation or superannuation pensions are involved.
Death benefit tax applies at the rate of 15% plus applicable medicare levy, on the concessional component of superannuation that passes to a non- financial dependent on death of the superannuant or annuitant. It also applies to a pension or an annuity that was established with money rolled from a superannuation fund.
What is a concessional component?
Superannuation is made up of concessional ( taxable) and non-concessional ( tax free) components.
The taxable amount is made up of anything that was taxed at the concessional rate of 15% such as employer contributions, tax deductible personal contributions or the fund earnings. It also includes any life insurance proceeds held within superannuation that passes to a non- financial dependent on death.
What are the practical considerations in estate planning to avoid or minimize this tax?
For retirees, who have allocated or account- based pension, enquire with your fund provider or financial planner, how much of the proceeds is concessional or taxable. What action to take depends on whether there is a spouse or financial dependent that is the binding or reversionary beneficiary of the proceeds or where the nomination is to the estate, whether the financial dependent inherits from the estate.
If there is a spouse who is to inherit the proceeds, then the issue of tax may not arise until the death of the beneficiary spouse.
A financial planner needs to ask when there are allocated pensions in place that contain taxable components and revolves around the potential loss of benefits such as tax free income and for those funds that were in place prior to 1/1/2015 and where the owner of the fund was on Centrelink benefits continuously since then, as there is a “grandfathering” of income assessment when it comes to determining Centrelink entitlements.
There is also a benefit with those pre- 1/1/2015 pension funds when the means tested fee for aged care is determined.
The future cost of death benefit tax on an estate then has to be weighed up against those benefits.
I am frequently closing down small pension accounts and placing them in a joint managed fund when it is determined that there is no loss of benefits for either the couple or the survivor of them, simply to avoid their loved ones paying tax on estate proceeds.
The tax can be avoided if the account is closed prior to death; such a person who is terminally ill or whose age and deteriorating health is obvious.
This also applies when there is life cover attached to a superannuation fund.
Generally, there is the capacity of a life company to pay a terminal benefit, prior to actual death where it is established that due to the nature of the medical condition, death is expected within 12 months.
By making application for the terminal benefit, the proceeds are first paid to the superannuation fund.
That enables the member of the fund or their appointee under Power of Attorney, to make application to the superannuation fund for release of proceeds of superannuation prior to their death, thus avoiding the death benefit tax that might otherwise arise when the intended beneficiaries are not financially dependent.
This may be the case when the parents of an adult child who has no dependents and is terminally ill, wishes the parents to receive their superannuation or life insurance or where they have adult children whom they wish to inherit.
This is not a complex issue that needs legal advice, it is a processing matter that requires the correct forms being lodged with the necessary validation of circumstances.
The value of an ongoing relationship with a financial planner or accountant, where an annual conversation and review takes place, should cover a review of circumstances.
Getting Nominations Right
Death benefit tax may be a consequence that the beneficiaries of an estate have to live with, because ultimately, it is more important to make sure that you have a valid Will and Testament and where superannuation proceeds are involved, having a binding nomination in place, that ensures your final assets go where you want them to.
However, making a financial dependent a beneficiary is a legitimate way of planning an estate to minimize the impact of death benefit tax.
Pre-retirement planning and downsizer
Drawing superannuation prior to retirement, or running it down using a transition to retirement pension and then re-contributing the proceeds as tax free to a separate fund, is one way to reduce the taxable components in superannuation.
However, for those who are retired and are still paying tax and selling a home ( after age 65) by using downsizer legislation, up to $300,000 can be placed to superannuation as a tax free pension. For a couple this can be $300,000 each.
This is one way of having a superannuation pension with tax- free components and then using the proceeds of any existing pension funds that may have taxable components, to purchase new accommodation.
As your life changes, an adviser, can help you navigate your way through financial decisions.