Tax Planning and Considerations in the Event of Simultaneous Death
Tax planning is a crucial aspect of financial management, and one effective strategy to mitigate tax liabilities is implementing Binding Death Benefit nominations. By utilising this approach, individuals can proactively safeguard their superannuation funds from potential taxation on the portion derived from tax-deductible contributions and the associated accumulated income.
During your lifetime, engaging in strategic tax planning can ensure that those in pension mode and 60 or over receive all their pension or lump sum payments tax-free, benefiting retirees financially.
The reversionary pension or lump sum payout can be a tax-effective strategy when it comes to superannuation and estate planning. In the case of death, these options offer potential tax benefits, especially when tax planning is considered.
Under the SIS Act, dependants such as spouses or children under 18, or those who were financially dependent on the deceased, may receive the reversionary pension or lump sum payout tax-free. It’s important to note that adult children, in most cases, may not fall within the definition of dependants and might not be eligible for tax-free benefits.
In the event of Dad’s demise, with Mum designated as the nominated pension beneficiary, she will be entitled to receive her pension tax-free. While not as tax effective going forward, if she received a lump sum, it would be tax-free as well.
However, upon Mum’s death, leaving a balance of her pension account still in the super fund, if she wills the fund to her adult children, they will have to pay 17.0% tax on that part of her balance which came from taxable contributions and income thereon. This taxable portion is likely to be most of the fund unless she has contributed non-deductible contributions to the fund during her lifetime.
One effective approach is for the surviving parent, whether it is Dad or Mum, to grant Powers of Attorney to their children, enabling them to take specific actions in certain situations with the aim of minimising tax obligations.
If the surviving spouse is terminally ill or has lost their ability to make decisions, the parties holding the POA could payout the fund to her before she dies, and she gets it all free of any tax. This would save the potential 17% tax if paid out on death to an adult child.
If both Mum and Dad die in the same car crash, there would be no opportunity to withdraw all their funds out of the super tax-free before death
If you do not have adequate Power of Attorney in place, you must talk to us immediately. It is advisable that you give a copy of this to whoever holds your POA and your children if they do not hold it so that they know they need to take professional advice if a surviving spouse becomes terminally ill and your fund needs to be cashed in before you die.
Tax planning plays a central role in this decision, which should not be taken lightly, as the planning revolves around paying the funds out of the superfund early to minimise tax. If, for whatever reason, the surviving spouse does not die for an extended period of time, and the fund has been paid out, then it makes the income on the investments taxable in their own hands from the time of payout to eventual death. This may end up costing you money. Careful tax planning implementation is necessary to avoid potential financial costs. This decision carries significant weight, but it can result in tax savings if approached with proper tax planning measures.
If you want to discuss the above, please contact us.
*Correct as of October 2014
*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
