The New Death Tax

I attended a financial planning talk yesterday. I was told that 3 years ago, there was on average, $450,000 in each Self Managed Super Fund. Today, it is $805,000. At that rate, your home will be your second biggest asset (that is, if you live outside of Sydney or Perth).

I was also told to leave your Superannuation in your SMSF’s at retirement. It is tax free. This also lets your children use your SMSF as a tax free savings account for themselves. That makes sense and many of our clients are taking advantage of that.

What worries me is “what happens when you die?” Does your Will deal with your Superannuation? Your Will only covers assets that you own. Many of our assets are not owned by us. They are “controlled” by us but not “owned” by us. Asset Protection strategies and the antiquated tax system in Australia force us to behave in this manner.

For example, Family Trusts, Joint Tenancy Assets and Superannuation don’t form part of your estate. Therefore, it doesn’t matter what you do because your Will can’t control assets outside of your estate.

The 3 problems I have are: Your Super goes to the wrong person; your Super is taxed at death and you can’t get the super in a timely manner.

Your Super goes to the wrong person
The person that controls your Superannuation is the Trustee. If the Trustee is your eldest son, he will no doubt want your Superannuation to go to him alone. He will probably get his way. This may make your other children unhappy, especially if that have been using your Super as their own savings account.

Let us assume you have done a “Will in your Self Managed Super Fund”. This stops your son from getting 100% of your Super and fixes the first problem. What now is the tax rate for your children? Good old Peter Costello gave our Super back to us in retirement without any tax – no capital gains tax and no income tax (yet we still threw him out of government). This is why no one is in a rush to cash in their Superannuation at retirement and why children are using your Super as a tax free bank (better and cheaper than a Swiss Bank account).

Tax on dead people’s Superannuation

However, now you die with a ton of money in your Super. This money is often not tax free. In fact, it will only be tax free if the money goes to your spouse, children under 18 and people you maintain (this can include a mistress). Given that your wife may be dead, your children are probably in their late 50s and you are not allowed to have a mistress, most of us are looking at suffering tax on our super when we die.

This non-dependency tax rate is 16.5%. You can avoid this tax through a Superannuation Testamentary Trust.

However, you have to this before you die.
Get Super out quickly when they die

Money coming out at death is a “super death benefit”. If you delay, you can turn that into a “super member benefit”. The death benefits get the better tax treatment.

The lump sum needs to be paid out 6 months after death or 3 months after the Grant of Probate (whichever is the later). You suffer a penalty if you jig about outside of these times.

If you do it within time, then there is no tax to mum, children under 18 and people you maintain (dependants). If you go outside the period, the payment to mum and these dependants moves from zero to 16.5%. It was free one month and then it was 16.5%. It is very unfair and cruel. Again, your financial planner may be able to wash out the mistake with pensions. However, it is better not to.