SMSFs, Super Reforms and Estate Planning What hat yo you need eed - PowerPoint PPT Presentation

SMSFs, Super Reforms and Estate Planning

What hat yo you need eed to to know ow The content of this presentation has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. You should obtain a copy of the relevant Product Disclosure Statement (PDS) before making a decision to invest in any financial product. Any advice in this presentation is provided by SMSF Administration Solutions Pty Ltd, ACN 097 695 988, AFSL No. 291195 which is part of the AMP group of companies.

Session Overview • Who can receive a death benefit • Taxation of super death benefits • Cashing of death benefits from 1 July 2017 • Death Benefit Income Streams & TBC • Reversionary vs non-reversionary pensions • Death benefit Rollovers.

Why so important? • 597,000 SMSFs at 30 June 2017 • Held $697 billion in assets • 1.1 million SMSF members • The majority of SMSFs (54%) held assets between $1 million - $5 million • At 30 June 2017, 43% of all SMSFs had individuals as Trustees. Source: ATO Self-managed super fund statistical report, June 2017

An aging demographic?

Who can receive a death benefit?

Who can receive a death benefit? • An SMSF Trustee can pay the deceased members superannuation death benefit to: • The Member’s Legal Personal Representative (LPR); or • One or more of the Member’s dependants (SIS Dependants) • Superannuation benefits do not automatically form part of the deceased Member’s Estate .

Who can receive a death benefit? • Superannuation Dependants: • Spouse: married, de-facto or same sex • Non SIS dependants can only receive death benefits via the Deceased’s Estate.

Taxation of Death Benefits • Taxation of the death benefit depends upon whether the Beneficiary is classified as a Tax Dependant of the deceased • Tax Dependant:

Taxation of Death Benefits • Lump sum payments • Death benefit income streams (only payable to dependants)

Superannuation Death Benefits Important: • The Superannuation changes on 1 July 2017 have not changed the definition of a superannuation dependent or the tax treatment of death benefits • The changes do limit the amount of a death benefit that can be retained in the superannuation system .

Cashing requirements of death benefits from 1 July 2017

Death benefit cashing requirements • Death is a compulsory cashing event – SIS Reg 6.21 • Death benefits should be paid ‘as soon as practicable’ – usually: • Within 6 months of death; or • 3 months from grant of probate • Whichever is the latter • Cashing means payment of death benefits as a lump sum, death benefit pension or a combination of the two.

1 July 2017 changes • A deceased Member’s benefit must be cashed • i.e. if paid as a lump sum – physical cash must leave the Fund (it cannot be ‘paid’ via a journal entry) • Death benefits cannot remain in Accumulation mode in the SMSF • Death benefits could be rolled over into another Superannuation Fund (pension must commence on benefit.

Transfer Balance Cap & Death Benefit Income Streams – 1 July 2017

TBC & Death Benefit Income Streams • From 1 July 2017 the TBC applies to limit how much a member can have in retirement phase over their lifetime • Upon the death of a member, their TBA dies with them (therefore, it cannot be “inherited” by a dependant) • Cashing a deceased’s benefit as a death benefit income stream will impact the recipient Beneficiary’s TBC .

TBC & Death Benefit Income Streams • A death benefit pension can only be paid to the extent that it does not cause the dependant to exceed their own TBC • Where the payment of a death benefit pension causes an excess against the Member’s TBC, the excess death benefit must be paid out as a lump sum death benefit • An excess death benefit cannot be retained in superannuation.

TBC & Death Benefit Income Streams • To reduce an excess Transfer Balance the Beneficiary could choose to: • Commute some or all of the death benefit income stream (commuted amount must be paid out of Super); or • Commute some or all of their own retirement phase income stream they are already receiving (commuted amount can remain in the Member’s Accumulation interest) • Commutation reported for TBAR.

Non-Reversionary Income Streams • These income streams cease on death of the member • Deceased’s Beneficiary can elect to receive the benefit as a death benefit income stream – subject to their TBC ($1.6M) • New death benefit income stream for Beneficiary to be reported for TBA purposes • TBA Credit arises on day the Beneficiary is entitled to the death benefit income stream • TBA value of death benefit is at date it becomes payable.

Non-Reversionary Income Streams Example: • Jason commenced an ABP on 1 January 2014; he didn’t make a reversionary Beneficiary nomination at the time • Jason’s TBA on 1 July 2017 was $1.6M • Jason dies on 20 March 2018 and his ABP was valued at $1.8M • Jason leaves behind his wife Jasmine • Jason’s BDBN states that Jasmine is to receive 100% of his death benefits.

Non-Reversionary Income Streams Example (Cont): • Jasmine was in receipt of an ABP of $1M at the time of Jason’s death (TBA = $800K) • Trustee decides to pay the death benefit on 19 September 2018; at which time it was valued at $2M.

Non-Reversionary Income Streams Questions: • What options does Jasmine have in respect of taking Jason’s death benefit? • When does the credit arise in Jasmine’s TBA? • What is the value of the TBA credit? • How does any death benefit pension impact Jasmine’s TBA?

Non-Reversionary Income Streams Example – Considerations: • Death benefits income stream vs lump sum payments • If Trustee chooses to pay Jasmine a death benefit lump sum: • Will not impact Jasmine’s TBA • $2M must be paid out of the SMSF as a death benefit lump sum • Jasmine continues her $1M ABP in the SMSF (TBA $800K at commencement).

Non-Reversionary Income Streams Example – Considerations: • Should Trustee decide to pay Jasmine a Death Benefit income stream, it would cause a TBA excess for Jasmine:

Non-Reversionary Income Streams Example – Considerations: • Jasmine’s options regarding a potential TBA excess: 1. Commute her $1M ABP back to Accumulation, plus $200,000 of the death benefit (of $2M) (which must be paid out of the Fund as a death benefit lump sum):

Non-Reversionary Income Streams Example – Considerations: 2. Commute the $1.2M excess from the death benefit income stream • $1,200,000 would be paid to Jasmine as a lump sum death benefit – the money would leave the SMSF:

Reversionary Income Streams • Upon the death of a Member, their income stream continues to be paid to a nominated reversionary Beneficiary • Reversionary Beneficiary is specified at the commencement of the original pension (Pension Agreement) • TBA Credit for Reversionary Beneficiary is delayed by 12 months - i.e. it arises 12 months after the death of Member • Value of Credit to TBA is value of income stream on date of death.

Reversionary Income Streams • 12 month TBAR grace period given to provide Reversionary Beneficiary time to manage any excess appropriately • Pension exemption (ECPI) continues on the reverted income stream for up to 12 months from the Member’s death whilst the Reversionary Beneficiary manages any potential TBC excess resulting from the immediate reversion of such an income stream.

Reversionary Income Streams • Trustee needs to ensure the minimum pension requirement is met in the year of death of original Pensioner • Reverted income stream does not cease unless the Reversionary Beneficiary commutes it.

Reversionary Income Streams Example: • Theo commenced an ABP on 1 October 2013 from his SMSF • He has utilised $1.6m TBC as at 1 July 2017 • Theo’s wife Kate nominated as Reversionary Beneficiary at commencement • Theo died on 1 March 2020 • Kate has her own ABP valued at $1M on Theo’s death.

Reversionary Income Streams Example: • Theo’s benefit is valued at $1.8M on his death (grown to $2M one year after his death). • What are the TBA implications for Kate? • What are Kate’s options regarding payment of Theo’s death benefit?

Reversionary Income Streams Example - Considerations: • Theo’s pension automatically reverts to Kate on 1 March 2020 • On 1 March 2020 Kate has the following benefits: • ABP $1M (TBA of $800,000) • Death Benefit Pension $1.8M • Credit to Kate’s TBA occurs on 1 March 2021 (causing an excess).

Reversionary Income Streams Example - Considerations: • Kate has the following 2 options in respect of Theo’s death benefit as her TBA will be in excess: 1. Commute her $1M ABP back to Accumulation by 1 March 2021, and receive the reversionary ABP from Theo of $1.8M (all benefits remain in SMSF).