A person’s will cannot generally direct the distribution of superannuation benefits. Their SMSF and their will can, however, work together to maximise benefits paid to the deceased person’s beneficiaries, says Michael Harkin.
Using a case study example, this article explains how, with effective estate planning, a person can ensure an equalisation of benefits paid to beneficiaries, albeit from different sources.
Laurie and Peg
Laurie and Peg have two children. John is 30 and fully independent of his parents. Mary, however, is 17 and in her final year of school.
Laurie and Peg each complete a binding death benefit nomination, which effectively mirrors the other spouse’s nomination. The binding death benefit nominations direct that, in the event of the death of the specific member, the benefits are to pass:
• first to the spouse if he or she survives, and
• second to Mary if the spouse is not living.
Fair?
It may seem at this point that John is being unfairly treated and this is where the issue of equalisation comes into play. The reason – in their wills, Laurie and Peg have directed that, in the event of the spouse having predeceased, their estate will pass:
• first to John, an amount equal to the amount Mary has received from the SMSF, and
• second the balance equally to John and Mary.
Equalisation
The advantages in structuring their wills and superannuation benefit payments in such a way can be summarised as the following:
• it provides the best overall tax result as Mary is likely to be a superannuation tax dependant for some years,
• a pension could be paid to Mary, and
• the amounts paid to John and Mary have been equalised.
In this scenario, we have assumed the value of the estate of the second of the parents to pass away is greater than the balance of their superannuation. But what if the super balance was greater than the value of the estate?
A reversal of the previous strategy could occur, in that:
• the first transaction is the payment of the total of the estate to John, and
• from the superannuation fund:
– payment to Mary of the same amount that John has received from the estate, and
– payment of the balance equally to John and Mary.
The advantages in this option are:
• although John will pay some tax, the tax result is better than spreading the superannuation equally,
• a pension could be paid to Mary, and
• the amounts paid to John and Mary have been equalised (at least before tax).
Death benefit guardian
In a scenario such as this, the appointment of a death benefit guardian can be very important to safeguard the distribution of the superannuation benefits, in line with payments from the estate, to ensure the deceased parents’ wishes are met in regards to the equal distribution of their wealth.
Conclusion
Distributions from the SMSF and the estate can be structured to provide equality in the most efficient manner. Ongoing review, however, is necessary.