SMSF trustees should consider having their estate be the beneficiary of a binding death benefit nomination (BDBN) to achieve a more tax effective outcome when directing superannuation balances to adult children upon their death, a technical manager has suggested.
“A lot of people have a BDBN that says in the first instance I want [the death benefit] to go to my spouse but if my spouse goes at the same time as me, or pre-deceases me, I want it to go to my two adult children directly. That’s fine but adult children also pay the 2 per cent Medicare levy. The estate [however] does not pay the Medicare levy,” SuperConcepts SMSF technical support executive manager Nicholas Ali noted during a recent adviser webinar.
“So that’s something to think about. While all circumstances are different, maybe you should consider having a BDBN [go] to the estate rather than your adult kids directly because you save them the Medicare levy,” he said.
Ali pointed out that while an additional tax imposition of 2 per cent may not seem to be very material at face value, it could translate to a significant liability on a death benefit payout of, for example, $700,000.
“[In this instance it could mean] a saving of $14,000 which is not a sum to be sneezed at,” he said but acknowledged this course of action may not be applicable in certain family circumstances.
“If you’ve got a very complex family situation like blended families, maybe the estate isn’t the best outcome, but if you’ve got a fairly standard sort of family setup, perhaps it’s something to consider,” he said.
Ali added that allocating a superannuation death benefit to adult children through the estate would not disadvantage them because of the method by which the payment is made, and they would have to take the payment as a lump sum as the law currently prevents them from taking it in the form of a pension anyway.