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What the Super Reforms Mean for your Estate Planning

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Winter is coming and so are changes to the superannuation system, starting on 1 July 2017.

One of the major changes is to limit the amount of super that a person can have in a tax free pension environment. In particular, a member cannot transfer more than $1.6 million of their superannuation account into pension phase.

As a result, many superannuation members will need to restructure their financial affairs and may be considering options such as transferring any excess super funds over $1.6m to accumulation accounts (in which case the earnings will be taxed at 15%) or withdrawing the excess funds from superannuation altogether to hold investments in their personal name instead.

Of particular interest to many Canberrans is that retirees who are receiving a defined benefit pension (such as a CSS or PSS pension) will have a formula applied to capitalise the value of that defined benefit pension, which will now count towards the $1.6m transfer cap.

The super reforms are complex and therefore you should get financial advice, well before 30 June 2017, as to how the changes will affect you

In thinking through what the super changes mean to you, it is essential that you also consider what impact the changes might have on your Will and estate planning. If you have previously made a Will, you should review your estate planning in light of the super changes.

You should particularly get specialist legal advice which considers the following issues:

  1. Is your Binding Death Benefit Nomination still appropriate?

If you have previously nominated your partner to receive your superannuation after your death, and if after your death your partner would then have superannuation pensions of more than $1.6m, then you should get financial and legal advice as to whether this is the most appropriate option. You should also bear in mind that if you or your partner is receiving a defined benefit pension, this will count towards the capital value of the pension.

  1. Should you consider including a testamentary trust in your Will?

If you have not previously included a testamentary discretionary trust in your Will for the benefit of your partner after your death, now might be the time to consider it.

A testamentary discretionary trust can provide tax flexibility for your partner after your death as it enables your partner to distribute income between your family group. Depending on your circumstances, and subject to financial advice, the inclusion of a testamentary trust in your Will may be a desirable vehicle for your surviving partner to manage their assets in a tax effective way after your death.

  1. Do you have a blended family and superannuation?

It is common for couples in a second relationship or blended families to have a tailored estate planning strategy that divides assets between different family members. Due to the tax treatment of super death benefits and the inability to nominate beneficiaries in some funds, superannuation is often a key element in estate planning for blended families.

If you are in a blended family and you specifically considered your super when you last made your Will or updated super nominations, then you should get advice about whether the super reforms will have an impact on your estate planning. This is especially important if you are restructuring your financial arrangements and withdrawing funds from super as a result of the reforms.

An example:

Mike is married to Carol. Mike has 3 sons from his previous marriage.

When Mike and Carol reviewed their estate planning a couple of years ago, Mike signed a Binding Death Benefit Nomination directing 100% of his superannuation death benefit to Carol. Mike and Carol’s home is owned as joint tenants, so it will automatically pass to Carol by way of survivorship. Mike wanted his other assets, including the term deposit and shares in his personal name, to pass to his 3 sons. On this basis, Mike signed a Will which divided his estate equally between his 3 sons.

Mike sought financial advice regarding the super reforms and, based on Mike’s circumstances, he was advised to withdraw a lump sum from his superannuation account to hold in his personal name. When Mike last made his Will, he had intended these funds to pass to Carol as part of his superannuation death benefit. Now that the funds are in Mike’s name, they will pass to his sons, unless he updates his Will.

Given that Mike’s financial situation has changed since he last made his Will, it would be wise for Mike to get legal advice about his estate planning strategy in light of his new circumstances.

The changes coming into effect on 1 July 2017 are the most significant reforms to superannuation law in a decade. Given that superannuation is a substantial component of wealth for most people, it is essential that you review your estate planning in light of the upcoming changes.

DDCS Lawyers can provide you with expert advice and assistance with your estate planning, including superannuation. Please call us on (02) 6212 7600 or email mail@ddcslawyers.com.au.