The super reforms are now well and truly embedded into our working day – legislative changes and restrictions, new acronyms, additional reporting, the list goes on.
One area that needs to be revisited with clients is the estate planning of their superannuation interests. The super reforms have brought about significant changes to the estate planning landscape. As such, a refocus on superannuation proceeds trusts (SPT) has intensified since the introduction of the reforms. So what is an SPT and how do they work?
An SPT is a trust set up to receive superannuation death benefits of the will maker following their death. Generally, the trust is similar to a testamentary discretionary trust, however, beneficiaries are limited to people who are death benefit dependants (as defined under section 302-19 of the Income Tax Assessment Act (ITAA) 1997) of the will maker at his or her death. If the only beneficiaries are death benefit dependants, then no tax is payable by the estate on the receipt of the death benefit.
If there are other beneficiaries who are not death benefit dependants, other assets of the estate can then be distributed to a testamentary trust(s) for these beneficiaries. This allows for not only effective asset protection, but tax planning based on the underlying beneficiaries.
In some instances an SPT can been established post death and hence not be part of the will. This can be effective where there are substantial superannuation assets, there are death benefit dependants (for example, spouse and minor children) and the deceased member has not incorporated testamentary trusts into their will.
However, there are limitations of post-death SPTs that must be considered. They are more restrictive than SPTs that are created via the deceased member’s will as per the following:
- Does the SMSF trust deed allow for a clear direction for the death benefit lump sums to be paid directly to the SPT?
- From a conservative point of view, the beneficiaries must be both entitled to the income and capital of the trust so as to benefit from the more favourable tax rates of the trust.
- There can be restrictions on the level of entitlements minor beneficiaries can receive.
- Certain technical provisions due to the interaction of the Superannuation Industry (Supervision) (SIS) Act and ITAA 1936, that is, does the trustee have the discretion to pay the proceeds to an SPT under the trust deed or even the law. This is still a point of contention. The SIS Act states a death benefit can only be paid to:
- a death benefit dependant of the member at the time of death, or
- the member’s legal personal representative.
Therefore, there is a view that payments direct to a post-death SPT satisfy neither of the above criteria. Even if the proceeds are paid directly to the death benefit dependant and then gifted to the SPT, there is a further risk the trust would not be allowed to access the excepted trust income provisions under division 6AA of the ITAA 1936. This would be the case as the income would be potentially seen to not be derived “directly as a result of the death of a person” and out of a provident, benefit superannuation or retirement fund.
Therefore, SPTs especially created via forethought, and as part of the deceased member’s will, can be an appropriate structure to use for estate planning purposes. They provide for tax efficiencies as there is no additional tax payment on the superannuation death benefits and minors are taxed at ordinary adult rates.
As an example, let’s look at two different scenarios. In the first instance, the super death benefit lump sum is paid directly into the estate from which the spouse and adult children are to benefit in equal shares. In the second scenario, the death benefits are paid to the estate and segregated into an SPT of which only death benefit dependants are beneficiaries, that is, the spouse and minor children and the rest of the estate is distributed to a testamentary trust(s) and/or equalisation clauses. The difference between the two is that no tax is paid unnecessarily on the super death benefits. In the first scenario, non-tax dependants would be liable for tax on their share of the super death benefit at a tax rate of up to 32.5 per cent.
Another major benefit is an SPT allows for asset protection as well as longevity. It can help protect dependants in situations such as bankruptcy, divorce and illness. In relation to longevity, a child account-based pension needs to be cashed out at the age of 25, while an SPT has a lifespan of 80 years in most jurisdictions.
As with all estate planning, it needs to be done on a project management basis. Understanding the tax and legislative application is one thing, but the execution and legal intricacies of SPTs and how they interact with other aspects of the client’s estate plan need the input of a specialist SMSF lawyer. A team approach is essential.