Super changes require rethink on estate planning

Members of self-managed super funds (SMSFs) should seek specialist advice on the possible impact of receiving a pension on the death of their spouse, says SMSF Association Head of Technical Peter Hogan.

He says that under the new superannuation rules that took effect on 1 July 2017, the assets supporting the deceased’s pension are counted towards the surviving spouse’s Transfer Balance Cap (TBC) that has been set at $1.6 million.

“The end result can be that where an SMSF is paying pensions to two spouses who are comfortably within their respective TBCs of $1.6 million, and one of them dies, the surviving spouse can suddenly exceed their TBC.

“It is an outcome of the new superannuation regime that has received little attention and the Association is concerned that many SMSF members and their advisers are ‘blissfully ignorant’ of the impact of these changes regarding the payment of death benefits.”

Hogan says it’s wrongly assumed that any excess above the $1.6 million TBC of the surviving spouse can automatically be moved back into an accumulation fund where it will be subject to the usual superannuation taxes.

“This is wrong. The rules for death benefits have changed in that any excess above the recipient spouse’s $1.6 million cap ‘inherited’ because of the death of a spouse must be paid out of superannuation as a lump sum; transferring it to an accumulation fund is not an automatic option under the new regime.

“Although it is possible to plan to influence this outcome, SMSF members need to receive specialist advice addressing their fund’s particular circumstances to get the best possible result.
“This may mean that members who have addressed their estate planning needs in the past will need to review those plans in the light of the changes that took effect on 1 July 2017.”

He says there would be many instances with SMSFs where the death of one spouse would trigger a situation where the surviving partner would receive a death benefit that took their TBC above $1.6 million cap. “This is not just a problem for SMSFs with large pension account balances already exceeding the $1.6 million cap.”