Business News

New laws make child pensions more technical

The arrangement and implementation for children receiving pensions will be made more complex and technical as a direct result of the $1.6 million transfer balance cap provision starting 1 July 2017.

In a recent online article, DBA Lawyers special counsel Rebecca James used the scenario of a member in accumulation phase, having not yet satisfied a condition of release to start an account-based pension, who tragically dies on 1 July 2017 with a super benefit of $4 million.

James said the binding death benefit nomination (BDBN) request for the death benefits to be equally split for the member’s two children, to be paid as a pension to each child to the extent permitted by super law and as authorised by the governing rules of the fund, would be greatly affected.

“Prior to 1 July 2017, each child would be eligible to commence a death benefit pension of $2 million,” she said.

“From 1 July 2017, however, each child will only be permitted to utilise their proportionate share of the applicable transfer balance cap had the member been eligible to commence a pension, being $800,000 each, that is, 50 per cent of the $1.6 million transfer balance cap.”

The remaining $1.2 million would be payable to each child as a lump sum, to be held on trust by the relevant guardian until each child turned 18, she added.

She highlighted that given the situation was not ideal from an estate planning perspective, there was an option to draft the BDBN to provide that each child was to receive a proportion of the deceased member’s super benefit up to their proportionate share of the member’s applicable transfer balance cap.

“The member could then direct that any excess above this amount is to be paid to the member’s legal personal representative and, accordingly, paid to one or more testamentary trusts to be held for the benefit of each child until age 25, or such other age as set out under the terms of the will,” she said.

“Thus, the capital could be quarantined for the benefit of each child until they reach the relevant age.

“This strategy also highlights the tension between retaining amounts in the concessionally-taxed super environment and achieving a greater level of control through a carefully drafted testamentary trust and appropriate trustee and appointor mechanisms.”

She noted in this scenario, a holistic and comprehensive succession planning strategy was fundamental to the success of this option.

Another outcome to consider, she said, used the same facts in the first example except that the member satisfied a condition of release and started an account-based pension with $1.6 million on 1 July 2017, where the income and capital growth on assets supporting the pension increased the pension balance to $4 million.

If the member tragically died, in this situation the two children could each receive a $2 million pension from the fund, being 50 per cent of the deceased member’s interest in retirement phase, she noted.

“As a pension has been commenced, the growth is captured in the retirement phase and thus, his children are able to retain that growth in the concessionally-taxed super environment until age 25, when the pension is required to be commuted and paid out as a lump sum,” she said.

“Importantly, the benefits received must be wholly sourced from the deceased member’s retirement-phase interests.

“Thus each child effectively inherits a proportion of the deceased parent’s retirement interest.”

Where a deceased member was partly in retirement phase and partly in accumulation phase, each child could not receive a pension from the accumulation balance without exceeding the applicable transfer balance cap, she noted.

“This is the case even if the pension balance is below the general transfer balance cap of $1.6 million,” she added.

“These examples highlight the disadvantage that may arise depending on whether a member is in accumulation or retirement phase as at their date of death, where pensions are being paid to minor children.”

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital