TBC can hurt death benefit pensions

Transfer balance caps

Trustees should understand how the death of an SMSF member could lead to potential issues with transfer balance caps and property.

Trustees need to be aware of how a death in an SMSF might give rise to potential issues, particularly in regard to transfer balance caps (TBC) and property, an SMSF legal expert has said.

“Lumpy assets in an SMSF and succession planning is a live issue these days,” DBA Lawyers senior associate William Fettes told a DBA SMSF Strategy Seminar in Sydney today.

“A lot of clients have worked really hard to get assets into super but may not appreciate fully that there’s an issue to manage on death of a spouse, for example, and that they may not have the ability to retain the asset in the fund.”

Fettes pointed out death benefits that were cashed by way of a pension would be tested in relation to the recipient’s TBC, which could result in a potential issue if a spouse with a high balance passed away and the preference was to pay a death benefit pension.

If the death benefit amount were to exceed the surviving spouse’s TBC limit, the SMSF assets may have to be taken out of the super environment, he said.

He noted in the case of an SMSF owning real estate there were further questions for trustees to consider, including whether the property could be retained in the fund after the death of one spouse and whether the property could be transferred out of the fund in specie.

In addition, trustees should be aware of whether the property could be kept in the family’s bloodline and be sure to clarify what any changes would mean in terms of capital gains tax and stamp duty, he said.

He highlighted the compulsory cashing rule requiring fund assets to be disposed of if there was no surviving spouse or eligible dependent to receive a pension as another factor for trustees to take into consideration.

Fund assets would also have to be disposed of as per the compulsory cashing rule if the market value of the relevant assets exceeded the surviving spouse’s TBC, he added.

Despite being introduced more than two years ago, an SMSF compliance expert has claimed TBCs still cause confusion for trustees while a senior financial advice figure has claimed they are causing compliance issues for financial planners and advisers.

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