Much has been written about the changes to the superannuation system as a consequence of the federal government’s ‘Fair and Sustainable’ superannuation reforms that commenced on 1 July 2017.
Most articles have focused on capital gains tax (CGT) relief and the taxation consequences of the transfer balance cap, particularly in respect of self-managed funds.
But the elephant in the room are the consequences for the estate plans of individuals with superannuation balances, particularly those in excess of the transfer balance cap.
The easiest way to illustrate potential issues is by way of a simple case study, pre 1 July 2017 and post 1 July 2017:
Pre 1 July:
Bob is in pension phase in his self-managed super fund (SMSF). He has a superannuation balance of $2 million that fully supports his pension. He is the only member of the fund and also the trustee of the fund. He has been married to Wendy for 20 years. It is his second marriage and he has three adult children from his first marriage.
His pension documents have been prepared as part of his estate planning strategy to ensure that Wendy is his reversionary beneficiary. Therefore his pension will continue on his death to her, tax free, for the remainder of her life.
In his Will he leaves the rest of his assets to his three children, as Wendy will have financial security from his pension, and appoints his three children as his executors.
Post 1 July:
Bob does not review his estate plan. He is killed unexpectedly in a car accident.
Prior to his death, to ensure his compliance with the superannuation changes, his accountant rolled $400,000 of his superannuation back to accumulation so that Bob complied with the $1.6 million transfer balance cap. In doing so, his accountant stopped his current pension and commenced a new pension supported by the $1.6 million. The new pension documents had no reversionary beneficiary.
On Bob’s death, his three children, as his executors, take control of his SMSF. There is no reversionary pension to Wendy and no binding nomination in place. They pay Bob’s death benefit, which includes the $1.6 million in pension phase and $400,000 in accumulation, to themselves. They receive the benefit of the full $2 million plus the other assets forming part of Bob’s estate.
Wendy receives nothing, subject to the necessity to commence an expensive, and potentially protracted, family provision application against the estate. As this takes place in Queensland, she will have no ability to claim any of the $2million superannuation death benefit.
Even if the accountant had ensured that Wendy was a reversionary beneficiary of the pension, the children would still have had control of the funds rolled back into accumulation to comply with the 1 July superannuation changes.
The above case study is not exhaustive of the estate planning issues that have arisen since 1 July. For example, if funds have left the superannuation system as part of the compliance process, there may be new structures in place that have not been dealt with at all as part of the estate plan.
It is therefore essential that estate plans be reviewed to take into account the 1 July changes as soon as possible.