Louise Biti shows the value advisers can add for clients with quality advice on superannuation death benefits.

Sound financial planning strategies, coupled with an adviser’s ability to determine the client’s specific needs and adapt the strategies to suit those needs, are at the core of quality advice. With a extensive tool kit of strategies, advisers can find opportunities to add value for clients and create business opportunities, even in a market downturn. A good example is the opportunity to provide advice on estate planning – especially when reviewing superannuation.

The principles of superannuation and estate planning are simple:

  • Superannuation is not generally an estate asset;
  • Trustee discretion applies unless a valid binding death nomination is in place;
  • SIS places limits on who can receive benefits and the form in which they can be paid, as well as how this decision is made; tax legislation details the taxation implications; while laws surrounding wills and family provisions can add an extra layer of uncertainty.

But it is how these principles are applied in practice that makes the difference and can determine what constitutes quality advice. Advisers may have two points at which client solutions can be developed: while the client is still alive (that is, at review time) or after death. Implementing a solution after death may not create the best result; rather it is a backup to mitigate negative outcomes and may have limited application. Estate planning is complicated, due to the nature and variety of families and relationships. Reviewing case law and real situations can help you to understand the practical implications and the difference that advice can make.

1. Modifying trustee decisions

The client died in July 2008. He was divorced and had two adult (non-dependant sons). His only assets were two superannuation funds. The first had a death benefit of $20,000 and the other had a balance of $7200 plus a $100,000 insurance component. For both policies, there was a non-binding nomination in favour of a previous de facto – but this nomination was not binding, so the trustees had full discretion as to whom they should pay the death benefit to. The previous de facto was not a beneficiary under SIS legislation and was not eligible. If, however, the ex-spouse had been legally married and the couple were separated but not divorced, she would still qualify as a SIS dependent.

A de facto spouse generally ceases to be a SIS dependant when the couple no longer live together on a permanent basis. This left the sons and the estate as the only qualifying beneficiaries. The initial decisions made by the trustees were: The decision by Fund A created no concerns, but Fund B’s decision did. The client did not have a will and had no other assets to distribute. To create an estate, legal fees may be incurred to obtain letters of administration from the courts. If a death benefit is paid to an estate, the estate is liable for the deduction and payment of any taxation. Therefore, the estate may incur further expenses to complete a tax return and for accounting services. The death benefit would already be reduced by taxation (approximately $26,000 tax on Fund B and $3300 on Fund A) and would be further depleted by legal and accounting fees. In addition, if the deceased had any outstanding debts, the creditors could potentially make a claim against the death benefit.

2. Special needs children

A father (age 59) has been diagnosed with a terminal illness. He has an account-based pension (ABP) in a self-managed super fund (SMSF) with a binding nomination to his wife. He is considering changing the nomination to leave a portion to his son as a pension. The son (age 16) has an intellectual disability and his father’s main concern is to leave the son some money, but without giving him control over the money. The son can receive the death benefit as an account-based pension, but unless he meets the definition of “disability”, as defined under Section 8(1) of Disability Services Act, it will need to be commuted at age 25 and paid to him as a lump sum. So while a pension can be paid, advice should also focus on some wider issues that the father may wish to take into consideration:

(i) Control of the money. The son is effectively the direct owner of an account-based pension. Once he reaches age 18 he may have the legal right to make requests for cash withdrawals from the pension  (depending on his level of legal capacity).

(ii) Social security. Once the son reaches age 18 he may qualify for Centrelink benefits. The impact of an accountbased pension or trust on his entitlements needs to be considered.

(iii) Appropriateness of an SMSF. If a death benefit pension is required it will need to be paid by the SMSF. The son will become a member of the SMSF and therefore, also a trustee of the fund (or director of trustee company). Depending on the son’s legal capacity, his legal personal representative can act on his behalf in this role. If the trustee is a corporate trustee, the corporate rules need to be checked to determine whether a personal representative can act as director on his behalf. The appropriateness of this strategy also needs to be assessed with a longer-term view. For example, what will happen when the mother dies
and the son is the only beneficiary? If the pension  had been set up under trust deed restrictions this will not be easy to transfer to another fund.

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