Case Study: Large SMSF and Death Benefit Planning

By Dylan Cresswell CFP ® – Private Client Adviser

We were recently referred to clients Peter and Mary.  They are seeking strategic advice in relation to their existing SMSF.

Peter, aged 62, has sadly been diagnosed with terminal cancer and with possibly months to live he has decided to retire from his sales role to enjoy spending time with his family. Mary is aged 57 and no longer employed. Mary will reach her Super Preservation age, one requirement for accessing super if retired, when she turns 58 in June.

Peter and Mary have invested well over their lifetimes and built a diverse wealth portfolio of Australian shares and investment properties in their personal names. These investments provide each of them with approx. $50,000 in assessable income.

Peter and Mary also have their own SMSF, which holds cash and property.  Peter has a member benefit of $2m in the SMSF, in a Transition to Retirement Income Stream (TRIS) Pension. Mary has a larger balance with $3million in Accumulation Super.

Mary wants to understand what options they have now and on Peter’s death to maximise their cash flow and super benefits. Interestingly, when they first arrived at our meeting one of their ideas was to withdraw Peter’s entire $2m Super benefit “to get it out of Super”. However, after further discussion, they realised that earnings generated from the investments would then result in an increase to their personal income tax. As Mary has more than $1.6m in her own Super benefit, she is extremely restricted in adding additional funds to super.

Strategy and Advice

With death benefit planning being a fluid timeframe, the most obvious issue is the unknown event dates. As such, we’ve broken down our advice to strategies available currently, immediately on death and post-death.

With Peter now retired and being over 60 we have advised him to immediately commence an Account-Based Pension (ABP) with $1.6m and, in conjunction with advice from their solicitor, Peter has completed a reversionary pension nomination to Mary, as spouse. The overarching benefit of updating from a TRIS to an ABP is the underlying tax rate reduces from 15% down to 0%. The remainder $400k is commuted back to Accumulation mode where Peter also completed a binding death nomination to Mary. It is important to note Peter now has unrestricted access to his entire benefit if he so desires, so funding personal cash flow remains achievable by lump sum withdrawals from the Accumulation benefit.

Whilst there is an opportunity for Mary to commence her own Account-Based Pension of up to $1.6m in June, she would be required to withdraw the legislated minimum of 4%. As Mary doesn’t need these funds to meet her living expenses and is heavily restricted in contributing to Super in the future, starting her pension would amount to leakage from the super environment. We are trying to achieve their goal of maximising the amount held in super, not depleting it.

Our advice at Peter’s death is that Mary broadly has 6 months to commence rearranging the SMSF memberships, with the aim of retaining as much of their benefits within the tax-effective super environment as possible. At this stage, it appears likely Peter’s Accumulation benefit of $400k will be compulsorily cashed to her personal account. Mary will also have to decide if she wants to take Peter’s Account Based Pension under the reversionary pension provision, or cash it in.

Our advice is to retain her entire $3m benefit in the Accumulation phase and receive Peter’s $1.6m as the reversionary pension, thus retaining $4.6m of their benefits within super.

Summary

By seeking professional advice from Solicitors, Accountants and Financial Advisers, these clients can be comfortable they are accessing and understanding the optimal strategies for their particular situation.  This allows the clients to focus their efforts and energies on what’s important to them at a difficult time.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation

Get the latest news on the Morrison Government’s Coronavirus Stimulus Plan.

READ NOW