Making sure death benefit payments aren’t detrimental

Which strategy is better can only be determined in hindsight and will depend on the tax status of the beneficiary who receives the death benefit. As a general rule:

• If death benefits will be paid to a spouse or child who qualifies as a tax dependant, the anti-detriment strategy may be more effective.

• If the death benefit is paid to adult (non-dependent) children the anti-detriment strategy is often more effective, but it will depend on the individual circumstances.

The issues with the conflict between cashout/recontribution and anti-detriment can be mitigated if the auditor method is used to calculate the anti-detriment payment as this option looks at actual tax paid rather than tax components at the date of death.

Rules of thumb

Anti-detriment can increase death benefits but the implementation may be difficult, especially for an SMSF. Some general rules of thumb to note:

• Consider public offer funds that allow anti-detriment payments;

• Keep good records in an SMSF and use the auditor method (with recontribution if possible);

• Consider trade-offs with recontribution and the formula method;

• The future of anti-detriment has the potential to be uncertain;

• Consider how an anti-detriment payment could be funded in an SMSF (for example, reserves or insurance payments) and start putting these strategies into place.

Louise Biti is a director of Strategy Steps – www.strategysteps.com.au