Business News

Death benefit planning necessary

Strategies around terminal illnesses and death may seem distasteful, but can effectively minimise tax and provide significant value and peace of mind for clients.

McPherson Super Consulting director Allan McPherson said an area that had changed in the past 12 months was the terminal medical condition.

“Pre-1 July 2015, it was a less than 12-month period and I think a lot of the issues were around breast cancer where it was difficult to say what was going to happen during that time, so they extended it to 24 months to allow more people to be able to get this benefit,” McPherson told the Self-Managed Independent Superannuation Funds Association SMSF Forum in Melbourne last month.

“It’s one of those things that we’ve done a fair bit of planning around and it is difficult planning.

“It seems a little tacky, but you can make some significant differences to people around this particular space.

“Sometimes we’ve missed out where we’ve been working on the strategies and the person has died before we could actually implement it, so you have to move very quickly, but it’s certainly a place where you can add significant value to clients.”

He said one of the early areas of planning to consider was checking whether the insurance in place was death cover and whether terminal illness cover could be added, as it offered an advantage.

“It gives you a lot of flexibility strategy-wise if you can access the insurance benefit prior to the death, so capacity to access the money tax-free or potentially take it out and recontribute it,” he said.

“We’ve done a fair bit of work also with total and permanent disablement (TPD) because if you’ve got a terminal illness, you will be total and permanently disabled normally.

“Look at where clients have more than one fund, potentially make a contribution to a fund, getting a TPD benefit determined in that fund and creating larger tax-free components, which allow drawdown of pensions.

“So effectively, we’ve got one fund that we’ve got a terminal illness benefit in, take that terminal illness money out, kick it into another fund, apply for a TPD benefit out of that fund.”

By doing that and rolling the TPD into another fund and drawing a pension from it, an almost 100 per cent tax-free component would be created, he said.

“From a strategy perspective, it creates a 100 per cent tax-free pension for the person who is dying, and when they do die, a reversionary pension to the spouse means there’s a significant amount of income that’s going to be able to flow out tax-free,” he said.

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