Understanding financial advice
Financial life goals
Tools and resources
Products and services
Investing with IOOF
Your retirement goals
Since the introduction of the 1 July 2017 super reforms, the interaction between the $1.6m transfer balance cap, the deceased’s total super balance and the rules applying to death benefits adversely affect pre-1 July 2017 super estate planning strategies because these are based on traditional assumptions when using Binding Death Benefit Nominations (BDBNs).
Death benefit income streams are now seen as credits to a beneficiary’s transfer balance account but how this affects the beneficiary depends on whether they receive a reversionary pension or a death benefit income stream. This article only details how the changes affect adults, additional and separate rules need to be considered for children.
The main change that may cause problems is the different treatment of reversionary pensions and a death benefit income stream, as explained below.
For an adult beneficiary receiving a reversionary pension:
For an adult beneficiary who elects to receive a death benefit income stream:
There are three main considerations:
To help you understand the impact of the changes, consider the case of Derby and Joan, below.
Derby then dies in December 2017 with an account balance of $900,000. The trustee determines that Derby’s benefit will be paid to Joan and she has the option to receive a death benefit pension.
What are Joan’s options?
If Derby’s pension was reversionary to Joan then Derby’s $900,000 will not count to Joan’s transfer balance account for 12 months, however, the decisions that need to be made are the same.
Derby and Joan’s situation is relatively straightforward but what happens if there are other circumstances, such as:
An adult beneficiary has a cap of $1.6m. This is irrespective of the source of funds so it does not matter whether the pension is from their own super account or their deceased spouse’s account.
Presuming that the benefit is not a reversionary income stream, the transfer balance account credit will occur at the time the pension commenced. In this scenario, beneficiaries will still have several months to request the benefit and organise their financial affairs to avoid excess transfer balance cap issues.
The magnitude of changes to legislation now means the possibility of an adverse outcome is amplified. The complexity of meeting the unique estate planning needs of your clients’ increases because are now more possibilities that need to be considered.
To illustrate this, consider the following example:
Bill’s super consists of:
Super accumulation = $600,000 (100 per cent preserved)
Life insurance in super
BDBN nomination = spouse 50 per cent children 25 per cent each
Bill’s super now consists of:
Super accumulation = $1,350,000 (100 per cent unrestricted non-preserved)
Bill decides to take:
BDBN nomination = Spouse 50 per cent and children 25 per cent each
At Bill’s date of death his total benefit is $2,966,000 consisting of:
Spouse = 50 per cent = $1,483,000 and
Children 25 per cent (each) = $741,500 (each)
The maximum permissible child death pension of $91,500 is derived from the pension account balance at death ($366,000) pro-rated by their portion of the death benefit (25 per cent each., Irrespective of this, $650,000 must be paid as a death lump sum benefit.
Bill’s eldest child is now 16.5 years of age, in a further 18 months, legal ownership of the pension fully vests to them.
In such a case, you should consider the following:
The 1 July 2017 super reforms have increased the complexity of estate planning through super. This article does not consider all the different scenarios you will now need to work through with your clients to ensure you meet their estate planning needs. The positive for you, as an adviser, is that the heightened level of complexity provides you with a great opportunity to demonstrate to your clients the value of your knowledge and skills in relation to estate planning and financial advice.