1UP: The new life of estate planning

While the incoming superannuation legislation does not directly alter the rules of estate planning, the $1.6 million transfer balance cap will have a significant impact on trustees’ succession objectives. Krystine Lumanta writes before the changes come into play it’s a timely opportunity to review and reconsider what is and what’s not in place.

As a result of the immense changes to the super system, effective succession within the super structure has arguably been narrowed and thus requires watertight planning for clients’ required outcomes and strategies in a post-1 July world.

According to SMSF Design co-founder Tracey Besters, estate planning is a foundational component of every SMSF and something each SMSF needs to consider.

“The most crucial part of estate planning in an SMSF is control – who will make the decisions and who will be responsible for the payout of death benefits, as well as what documentation will be required,” Besters tells selfmanagedsuper.

“Just as crucial though is control in the event of incapacity while the member is still alive. Not all SMSF members suddenly pass away; there is a period that is often lengthy of incapacity prior to death.”

Ideally, she believes estate planning starts with control on incapacity via an enduring power of attorney (EPOA) while the member is still alive and then leads to control via the executor/s on death.

DBA Lawyers director Dan Butler says succession is all about getting the right assets to the right person at the right time.

“The big change is that there will be a lot more money being flushed out of super because of the $1.6 million transfer balance cap and the inability to pass anything more than the transfer balance cap to the surviving spouse,” Butler explains.

“Advisers need to focus on the control factor and review each member’s super strategy in line with their plans for succession from a holistic view and ensure consistency across the trust deed, binding death benefit nominations (BDBN) and EPOA.

“Also, make sure you’re getting quality advice and quality documents.”

Besters points out there will be both problems and opportunities for SMSF advisers and trustees.

“The problem with the super reforms in regards to estate planning is that we can no longer retain all death benefits as an income stream, for example to a spouse, we now have to deal with the interaction of the $1.6 million transfer balance cap,” she says.

“One thing that is certain is that we cannot ignore estate planning.”

Transfer balance cap considerations

Prosperity Wealth Advisers associate director Gary Dean says the main problem faced by beneficiaries in the future will be that they will not inherit the deceased person’s transfer balance cap and the death benefit payment will be counted towards the beneficiary’s own transfer balance account.“Effectively, the super entitlements for a couple that were previously assessed under two separate transfer balance caps will now be assessed only under the surviving spouse’s own transfer balance cap,” Dean explains.

He says this may have adverse implications when a beneficiary receives a superannuation death benefit pension that causes them to exceed their own transfer balance cap.

“In the scenario where the death benefit pension results in the beneficiary exceeding the transfer balance cap, and they elect to commute the excess death benefit pension amount, it must be cashed out of the fund as a lump sum payment as soon as is practical,” he notes.

“The excess funds cannot be held in accumulation phase within super by the beneficiary.”

Besters says essentially the transfer balance cap provisions must be considered each time an income stream is to commence, which includes a death benefit income stream.

“The transfer balance cap rules are clear in the respect that an individual will have a personal transfer balance cap and that individual can only have up to that cap within their retirement-phase accounts,” she says.

“Any amount over this will need to be commuted.

“For individuals with an income stream as at 1 July, the personal balance transfer cap is $1.6 million – the personal balance transfer cap is set in accordance to the general transfer balance cap.”

She points out the general transfer balance cap is set at $1.6 million as at 1 July and this amount will increase in increments of $100,000 in line with the consumer price index.

If the general transfer balance cap is $1.7 million in the future, any individual who commences an income stream, or is in receipt of a death benefit income stream, will have a personal transfer balance cap of $1.7 million.

Further, an individual’s personal transfer balance cap will only index in line with the general transfer balance cap proportionally, based on the unused amount of their cap, Besters says.

Importantly, if an individual has used their entire personal transfer balance cap, they will receive no indexation.
Looking at the assessment against an individual’s personal transfer balance cap, it is recorded via their transfer balance account, Besters says.

“If the balance of the transfer balance account exceeds the personal transfer balance cap, then an excess transfer balance amount occurs, an earnings rate is calculated and the individual is liable for tax on the earnings amount at 15 per cent for the first occurrence and 30 per cent for any subsequent occurrences,” she explains.

“For a spouse to receive a death benefit income stream they will need to have available personal transfer balance cap space, and they will only be able to receive a death benefit income stream up to the available cap space.

“Anything above their personal transfer balance cap will need to be paid out as a death benefit lump sum.”

A death benefit paid as a lump sum will neither impact on nor form part of the transfer balance cap.
Besters adds that in the case of children, they will be assessed against the deceased parents’ personal transfer balance cap proportionately with the death benefit they receive.
Children are entitled to receive a death benefit income stream up to the age of 25, where at that point the income stream will need to be commuted and withdrawn from the SMSF as a death benefit lump sum.


Any current pensions should be reviewed to determine whether there are auto-reversionary clauses. Transition-to-retirement income streams (TRIS) will not form part of retirement-phase accounts from 1 July, but on death, the amounts in the TRIS will form part of an individual’s total super balance and treated as part of the death benefits.

According to Besters, reversionary pensions, which automatically revert to a beneficiary with no trustee discretion, have a different timing impact on the personal transfer balance cap than a non-reversionary or discretionary pension.

“An auto-reversionary pension will only be counted towards the personal transfer balance cap 12 months from the date of death, and the value that is counted is the value of assets at the date of death,” she says.

“Payments will begin immediately to the beneficiary on death of the member.

“With a non-reversionary pension, the payment to the beneficiary will only commence once the death benefit income stream has commenced. The pension will be counted towards the personal transfer balance cap on the date the death benefit income stream is commenced with a value at the same date.”

Butler advises that while many would assume reversion is the best way to go, it should be questioned.

“Because if the surviving spouse takes over the pension, then the surviving spouse dies, then money gets hit for death tax with the money going to the adult children, so is the extra time you can keep the money in the super fund really worth it, once you take into account the death tax?” he poses.

“Also one of the big issues with the reforms is that quite a few people have reversionary pensions and 1 July is coming at us like a fast train.

“The condition in Law Companion Guideline 2017/D3 says you have got to cash out because you cannot commute back into accumulation a deceased reversionary pension. But a lot of people are finding it very harsh; the law seems to be having a very retroactive impact.”

Life insurance

Risk policies should be reviewed in light of the super changes as any amount of life insurance proceeds above the transfer balance cap will need to be paid out as a lump sum death benefit, Besters says.Thus consideration should be given as to whether the life insurance policy should, in fact, be held outside of the super system.

At the SMSF Association NSW Local Community forum held in April in Sydney, discussions around pre-July SMSF implementation of the changes uncovered numerous practitioner concerns around insurance, which all boiled down to the legislation failing to consider it.

“In fact, it hasn’t been addressed at all,” SMSF Association head of technical Peter Hogan told delegates.

“So I do think we need further clarification on insurance from the government.”

Beware of dodgy documents

According to Butler, most BDBNs are prone to failure.“Firstly, most people don’t have a BDBN but they think they do, and also most BDBNs are faulty because they have been prepared by advisers who are not lawyers, and in my view you don’t do the BDBN in isolation of the overall estate plan,” Butler reveals.

“So a lot of these succession plans are prone to being torn apart by any lawyer.

“One of the things we emphasise is to be aware that this is not a controlled market and, admittedly, a lot of the people who should be doing this work, being lawyers, aren’t on top of the game. Therefore a lot of the work has gone to accountants and financial planners, many who are inexperienced, unqualified, unlicensed, are probably in breach of the law, and also probably not covered by their PI (professional indemnity) insurance.”

Easy access to cheap online BDBN and EPOA documents has been a key issue as to why many advisers were bearing a lot of unnecessary risk.

“There’s a feeling that [online documents] are safe and everything is a-okay without getting the law involved. But when you read the detailed terms and conditions it says it’s not a legal document and that it must be signed off by your own legal adviser,” Butler says.

“There are so many suppliers out there that are dangerous, but that doesn’t stop them from being popular, and so for many clients when they die [the rug] is pulled out from underneath them, the money goes pear-shaped and not as they intended, and so there’s a big dispute.

“This is serious stuff and you only get one go at this: when you’re alive.”

Address illiquidity

Dean adds advisers will need to pay particular attention to SMSF clients who hold substantial levels of relatively illiquid assets within their SMSF.“For example, in SMSFs that hold investments in residential and business property, where the property is worth more than, say, $2 million to $3 million in a two-member fund,” he says.

“In the event that a member dies, the SMSF may not have sufficient liquidity to cash out a lump sum death benefit payment, then the trustees may be forced to either sell the business property or in-specie transfer a portion of the property out of the fund.”

The post-1 July world

In the future, a well thought out estate plan should take into consideration strategy options that are designed to equalise member balances between couples, according to Dean.“The earlier this strategy commences, the greater will be the opportunity for individuals to retain a higher proportion of wealth in the super environment when they ultimately become the recipient of a super death benefit payment,” he says.

“The new rules give clients more flexibility and choice in relation to the portability of death benefit pensions.

“Under the new rules, clients will have the option to roll over both new and existing death pensions from one super fund to another.”

BT Financial Group head of financial literacy and advocacy Bryan Ashenden says arguably clients will only be affected by the super rules if their balance plus their partner’s balance plus any insurance in super is more than $1.6 million in total.

“But all of this is an example of where new rules could have an impact where clients thought they wouldn’t,” Ashenden warns.

“The legislative changes to super are a great reminder that estate planning is never something that should be viewed as static. It’s never a case of set and forget.

“Investing the time now can save on difficulties at a time when those left behind have to deal with the personal side of the impact of the death of a loved one.”

A well-designed SMSF estate plan will need to consider:

  • Who will have control of the payment of death benefits?
  • Who are the beneficiaries and in what format should they receive a death benefit – lump sum or income stream?
  • How will life insurance proceeds impact on the above?
  • Are there any factors to consider binding directions upon the trustee such as a binding death benefit nomination or an auto-reversionary pension?
  • What impact will a binding direction have upon the transfer balance cap of the beneficiary? What measures will need to be taken to ensure no excess of the personal transfer balance cap?
  • What are the taxable and tax-free components of the member accounts?
  • How will the death benefit payments be funded – is there sufficient cash or liquid assets to fund a lump sum death benefit if the amounts cannot be retained within the SMSF?
  • How will property assets be dealt with on the death of a member? Will the SMSF need to dispose of the asset and if so, what stamp duty and capital gains tax situation will arise?

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