Three Part Series

This article is the first in a three-part series setting out practical solutions to common issues in super, tax and estate planning, with a particular focus on the tax impact of payments to beneficiaries.

Pre-death super withdrawals

Withdrawing super benefits before death can eliminate or reduce the ‘super death tax’ on death benefits paid to beneficiaries, particularly for a surviving spouse (where often the super beneficiaries will be adult children, who are typically not death benefit dependants).

Whether or not to withdraw benefits pre-death should be considered as part of the member’s overall estate planning, including both super and non-super assets.

Withdrawal documents can be prepared in advance and could include the ability of attorneys to action the withdrawals if the member has lost the capacity or ability to do it themselves. The documents could also include express provisions that allow an attorney to action the documents even if there is a conflict of interest (for example, the withdrawal will reduce the death tax payable on the benefits ultimately received by the attorney after the death of the member).

The below case study illustrates the importance of conducting estate planning as a holistic exercise, rather than siloed. For example, where a member plans to withdraw benefits prior to death, the will should contemplate super proceeds forming part of the estate. Ideally this would be done at the same time as putting in place the pre-death withdrawal documents (i.e., while the member still has capacity), as once the member loses capacity the will cannot be amended.

Case study

Maeve, age 90, is in ill health and deteriorating rapidly. Her doctors have indicated that Maeve will likely die within a week. Maeve has three adult children: Brendan, Kevin and Seraphina. Brendan has been living with Maeve in her home for many years, and Maeve has appointed Brendan as her attorney under a superannuation-specific enduring power of attorney.

Maeve’s estate planning arrangements are as follows:

Brendan to receive sole ownership of Maeve’s home under the terms of Maeve’s will
Kevin and Seraphina are nominated under Maeve’s will to each receive 50% of Maeve’s super

As Maeve’s attorney, Brendan makes a request on behalf of Maeve to withdraw Maeve’s remaining super balance prior to her death. Maeve’s super therefore forms part of her personal assets and when Maeve passes away, the super proceeds are distributed according to her will.

Kevin and Seraphina each receive 50% of the super proceeds but as they were withdrawn prior to Maeve’s death and form part of Maeve’s personal assets, the death tax of up to 15% plus Medicare levy was not triggered on the taxable component.

Critical to the success of this example is that the terms of Maeve’s will expressly contemplate the super proceeds forming part of Maeve’s estate, and deal with them specifically (rather than them forming, for example, part of the residuary estate).

To illustrate, let’s consider the outcome if Maeve’s estate planning arrangements were as follows:

Brendan to receive sole ownership of Maeve’s home under the terms of Maeve’s will
Kevin and Seraphina nominated under Maeve’s BDBN to each receive 50% of Maeve’s super
Maeve’s will nominates each of Brendan, Kevin and Seraphina to receive an equal share of the residuary estate
No specific provision under Maeve’s will for super proceeds

In the above example, if the pre-death withdrawal of benefits was implemented, the ‘super death tax’ would not be triggered.

However, as Maeve’s super was withdrawn before her death, the BDBN is inoperative.

Her super would form part of her estate and is dealt with in accordance with the terms of her will.

As Maeve’s will does not expressly deal with super proceeds, the super forms part of the ‘residuary estate’ which is divided equally between Brendan, Kevin and Seraphina, which does not accurately reflect Maeve’s wishes as set out in the BDBN (i.e, that her super is to be divided 50/50 between Kevin and Seraphina).

Part 2: different tax treatment between super beneficiaries

Part 2 of this article series will look at how to ensure equal treatment between super beneficiaries, where there is a mix of death benefit and non-death benefit dependants.

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au

Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au