Accounting, Management

Estate planning flexibility needed for TBC

SMSF trustees run the risk of unnecessarily exiting money from the tax-effective superannuation environment as a result of rigid estate planning policies in the current transfer balance cap (TBC) environment, a specialist document provider has warned.

According to SuperCentral, the situation arises when advisers and their clients ignore the details of how an individual’s TBC operates.

A TBC credit is allocated to an individual for the value of the pension at commencement, but from that point will not take into account any increase or decrease in the value of the assets supporting the income stream.

This means a decrease in the value of pension assets gives rise to the ability for a beneficiary of a reversionary pension and a binding death benefit nomination (BDBN) to retain more money within the tax-effective superannuation environment upon the death of a member, SuperCentral said.

To illustrate, the document provider offered a fairly standard situation where each member of a two-member SMSF had a total super balance of $2.5 million and had started a pension to the value of $1.6 million. On the death of one member, and assuming the pension is reversionary and the remaining amount in accumulation would be allocated to the remaining member under a BDBN, the surviving member would potentially commute their own pension, retain the reverted pension and exit the remaining accumulation account money from the BDBN from the SMSF.

SuperCentral pointed out this scenario is based on the premise both original pension values would remain close to $1.6 million and would not rise or fall significantly.

However, the strategy means if the reversionary pension value fell to $1.2 million, and the surviving member’s pension assets appreciated to $2 million, the remaining $900,000 in the deceased member’s accumulation account would have to be jettisoned from the SMSF as a lump sum as the BDBN would potentially not incorporate any flexibility, SuperCentral said.

Instead, SuperCentral recommends putting in place a tailored BDBN that would allow the surviving member to use any remaining funds in the accumulation account of the deceased to top up their TBC and subsequently keep more money in the tax-friendly super environment.

In the scenario above, SuperCentral suggests it would mean the surviving member commutes their pension of $2 million, leaving them initially with a TBC debit of $400,000. As such, the tailored BDBN would allow the surviving member to accept the reversionary pension of $1.2 million and top it up with an additional $800,000 from the deceased member’s accumulation account.

SuperCentral explained the end result would mean only $100,000 of accumulation account money would have to exit the fund as a lump sum rather than $900,000.

However, the documentation provider did stress not all cases would be as simple as the example it used and seeking specialist estate planning advice was imperative.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital