Latest SMSF Estate Planning Trends and StrategiesDeborah WixtedHead of Technical Services, Colonial First State

Disclaimer

Adviser use only

This presentation is given by a representative of Colonial First State Investments Limited AFS Licence 232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled Superannuation Trust ABN 51 982 884 624. The presenter does not receive specific payments or commissions for any advice given in this presentation. The presenter, other employees and directors of Colonial First State receive salaries, bonuses and other benefits from it. Colonial First State receives fees for investments in its products. For further detail please read our Financial Services Guide (FSG) available at colonialfirststate.com.au or by contacting our Investor Service Centre on 13 13 36.The information is taken from sources which are believed to be accurate but Colonial First State accepts no liability of any kind to any person who relies on the information contained in the presentation.  Colonial First State Investments Limited is not a tax agent. If anyone intends to rely on advice you give to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law –  they should request advice from a registered tax agent.

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Focus of estate planning

Who will receive the SMSF death benefit?In what form – lump sum or pension – will the SMSF benefit be paid?Taxation

Of the death benefit paymentOf the fund assets required to make the payment

Control and management of the SMSFManagement of fund assetsHow does the SMSF death benefit interact with other assets and structures?

A typical SMSF

Two individual trustees / membersAged in their early 60sLike to include family membersWant better tax planning – could include death benefits

Approx. 60% of all SMSF assets in shares and cashMost likely source of asset concentration

Trustee / member B

Trustee / member A

SMSF

Cash Australian shares

Trend: binding nominations

SMSF Determination SMSFD 2008/3 clarified binding nominations not subject to provisions of SISR 6.17A

manner of identifying benefit recipient and proportion of benefit they’ll receivenon-lapsing

Ensure governing rules permit this flexibilityDonovan v Donovan

Cooper Review and binding nominations

“The SIS Act should be amended so that binding death nominations would be invalidated when certain ‘life events’ occur in respect of the member. The current systems used by States and Territories under which testamentary dispositions are invalidated could be used as guidance”

“Subject to [this] recommendation being implemented, the SIS Act should be amended so that binding death benefit nominations only have to be reconfirmed every five years”

No details on how non-lapsing binding nominations would be affected

Trend: ‘superannuation will’

Binding nominations PLUS specific provisions in governing rules

Leave specific super death benefits to specific beneficiariesProvide for executor to take deceased member’s placePay out specific assets to specific beneficiariesMake conditional or contingent death benefit payments

Important to engage other estate planning professions to ensure success

Take care with understanding of the term ‘will’

Trend: death benefits to ‘non-traditional’ beneficiaries

Interdependency relationshipExists where there’s a close personal relationship and –

live together, one/each provides other financial support, OReither or both disabled or because temporarily living apart

SCT March 2010 bulletin: ‘temporarily living apart’ requires parties to have lived together at some time

Not necessary if separated due to physical, intellectual or psychiatric disability (eg. dementia)*

Financial dependencyPartial financial dependency sufficient (Noel v Cook)Financial dependence doesn’t equal financial “need” (Faull v SCT)

* Refer SCT D09-10\005

Taxation, insurance and SMSFs

$150,000 taxable

50%

Pension

Proportions determined on commencement

$1,000,000 insurance proceeds received $1,000,000 insurance proceeds received

$150,000 tax-free

50%

Accumulation

Proportions determined at time of payment

$150,000 taxable

50%

$150,000 tax-free

50%

$1,150,000 taxable

88.5%

$150,000 tax-free

11.5%

$650,000 taxable

50%

$650,000 tax-free

50%

1. Accumulation or pension interest?

Taxation, insurance and SMSFs

2. Untaxed elementATO ID 2010/76 clarifies that a lump sum death benefit will include an untaxed element where the benefit includes life insurance proceeds and a tax deduction has been claimed for:

life insurance premiums or for a future benefit liability

Not necessary to claim a deduction:In every income year, orIn the year in which the death benefit is paid

Consider taxation impact of any death benefits paid to non-dependent beneficiaries

Additional insurance cover may be neededRollover any other super benefits with longer service periods

Anti-detriment and SMSFs

Anti-detriment benefits in SMSF may be funded out of a reserve

Amount allocated out of reserve to increase death benefit

Allocation will count to deceased member’s concessional cap

ExampleTom is age 55 with 20 years service$600,000 super balance, all taxable component, all non-preservedTom is the only member of his SMSFHow can Tom maximise the death benefit paid to his

surviving adult children?

Anti-detriment and SMSFs

Anti-detriment Re-contribution

Account balance on deathTax-free componentTaxable component

$600,000$0$600,000

$600,000$450,000$150,000

Anti-detriment payment# $83,270 $20,817

Total death benefitTax-free componentTaxable component

$683,270$0$683,270

$620,817$450,000$170,817

Tax on death benefit $112,739 $28,185

Excess contributions tax* $13,315 $0

Net benefit $557,216 $592,632

# Using formula in ATOID 2007/219

* Assumes 9% SG contributions on $100,000 salary, $50,000 concessional cap and 31.5% excess contributions tax

Control and management of SMSFs

Graph 1 – an older population of SMSFs means an increasing likelihood of the SMSF making a death benefit payment 

Graph 2 - the death or mental incapacity of a trustee means some form of restructuring of the fund and its assets will be required.

Graph 3 – the prevalence of mental incapacity through dementia in an ageing population. Without proper planning restructuring of an SMSF becomes difficult

Management of fund assets

1. Preserve fund assets following deathAvoids:

Selling an asset when not desirable to do soIncurring unexpected valuation and transactions costsTriggering a capital gains event

Possible strategies:Pay and income stream benefit supported by the assetCash contribution by beneficiary plus ‘asset swap’Non-member benefit life insurance policy plus ‘asset swap’In-specie lump sum death benefit in whole or part

Management of fund assets

2. Capital gains tax, exempt current pension income and the death of a memberTax exemption on income from assets supporting pensions may be extinguished on the death of the last memberRequires liability to pay a pension death benefit to avoid CGTRefer:

ATO ID 2004/688 National Tax Liaison Group Superannuation Sub-committee discussionsATO Priority Technical Issue and possible ruling

Management of fund assets

2. Capital gains tax, exempt current pension income and the death of a member, continuedStrategy: turnover fund assets

Refresh cost base without undertaking ‘wash sales’

Strategy: offset taxable income from gain with deduction that arises by paying an anti-detriment payment

Strategy: offset taxable income from gain by claiming a deduction for future benefit liability

Eg. 55 year old with $420,000 balance and $600,000 death cover could result in a deduction of over $290,000

Management of fund assets

3. Limited recourse borrowing and estate planningMany commercial borrowing arrangements require fund assets to generate a threshold level of incomeDeath of a fund member and need to pay a death benefit may require asset sales that lead to an inability to generate this income

Strategy: SMSF trustees obtain non-member benefit life insurance cover over each member

Provides funds to pay out SMSF’s loanCreates a fund reserve

SMSF estate planning in context

Good estate planning for SMSFs means understanding:It’s not only about super death benefits paid from the SMSFThe interaction of the SMSF, its assets and other assets held by the memberThe provisions of the member’s will The future of the SMSF itself