Employing a withdrawal and recontribution strategy involving future death benefit recipients can ultimately assist in the retention of assets within an SMSF, a technical manager has said.
Heffron head of SMSF technical and education services Lyn Formica recognised using a withdrawal and recontribution strategy can lead to a smaller benefit needing to be paid out upon a member’s death and could lead to a less disruptive outcome for an existing fund.
“What we’re talking about, and we’ve had a couple of clients do it, [is] where [an existing SMSF trustee] gets [for example their] two daughters to join the self-managed superannuation fund. [The trustee then] takes out $200,000 more than she needs each financial year [and] gives $100,000 to each kid and they then use that money to make a non-concessional contribution to exactly the same superannuation fund,” Formica said.
“What that means is that [the original trustee’s] balance is going to progressively fall and the girls’ balances are going to rise.
“If we can do that for long enough, then we’re going to have a very small death benefit to pay out [when the original trustee passes away] and the girls are going to have a much higher balance.”
According to Formica, having to pay out a smaller death benefit will result in less strain being placed on the liquidity of the SMSF at that time. This in turn will mean any large illiquid assets that would otherwise have had to have been sold in order to pay out a larger death benefit could be retained within the superannuation environment, netting the remaining members a more favourable financial position.
Formica cautioned while this strategy can be of advantage to many people, there are some associated pitfalls requiring consideration.
“I’ve seen this work quite well in a number of situations, but it doesn’t work for everyone. There are lots of other things to think about, [like] how much of a superannuation balance do these kids have already,” she said.
“Remember, [the] total superannuation balance is going to determine their non-concessional cap. [So] if they’ve already got a significant balance, they might not be able to stay under that threshold long enough to be able to make non-concessional contributions for long enough to allow the strategy to work.”
