SMSF members should consider looking beyond the use of a binding death benefit nomination (BDBN) where the fund members are a couple in a nuclear family with dependent children who can receive a pension if a parent dies, an SMSF legal specialist has suggested.
Merthyr Law director and SMSF specialist adviser Kieran Hoare said the use of a BDBN is often the standard way to handle death benefits in a nuclear family, but this can require having to remove a lumpy asset from the fund and saddling the surviving partner with an extra tax burden.
“I worry sometimes when I see the standard for nuclear families is a binding death benefit nomination to the spouse where they also have little kids. There’s no one else who is going to claim so the super benefits can only go to the spouse or the estate,” Hoare told attendees of a recent presentation hosted by the Institute for Financial Professionals Australia.
“These are okay options, but we might be limiting ourselves if we’re doing a BDBN just to a spouse.”
He gave an example of a fund member with a balance of $3 million who passes away.at age 44, leaving a wife and two young children.
“If he had a death benefit pension from his $1.7 million transfer balance cap (TBC), his spouse is still paying tax on those pension payments. She gets a 15 per cent rebate, but it’s still on the marginal tax rate so it’s not great,” he said.
“[In comparison] paying that out as a child pension to those kids, and there are programs out there that calculate how to do that, it’s essentially $850,000 per child, being one half of the TBC.
“The benefit here is the kids’ marginal tax rate is going to be pretty low. It’s good tax planning and we’ve also got the exempt current pension income inside of that fund.
“We have also managed to keep the $1.7 million or $1.9 million inside the fund and it helps keep any lumpy assets inside the fund for a while longer.”