Estate Planning / Mar 01, 2021

Death and Transfer Balance Caps

Mark Phillips
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by Mark Phillips

We often receive queries from our network in relation to their SMSF clients, and some of these form the basis of our Monday articles. Recently we were asked about the treatment of death benefits in an SMSF where a husband and wife both have in excess of $1 million each in retirement phase pensions. There are a number of elements to consider.

Lump Sum or Pension

From 1 July 2017, death benefits must be paid as either a death benefit lump sum or a death benefit pension. Where paid as a lump sum the benefit must leave the superannuation system and cannot be rolled over.

A death benefit pension can only be paid to a dependent (a spouse, a child under 18, or a child under 25 that has a permanent disability). Death benefit pensions must continue to be paid as a pension. If commuted they must be paid out as a lump sum or be immediately rolled over to begin another death benefit pension. The proceeds of death benefit pensions must always be kept separate, they cannot ever be mixed with other benefits.

Reversionary or Not

Where a pension is established with a reversionary beneficiary, ownership automatically passes to the nominated reversionary on death of the primary pensioner. Where there is no reversionary beneficiary (or the beneficiary pre-deceases the primary pensioner) the benefit can be dealt with under a valid Binding Death Benefit Nomination if one exists, or by trustee discretion in accordance with the trust deed. In either case the trustee may decide to pay the benefit as a pension if the beneficiary is eligible.

Transfer Balance Caps

Where a death benefit pension is paid, it is the recipient’s transfer balance cap that is relevant along with the type of pension:

  • Where the pension continues to a reversionary beneficiary, the account value is determined on the date of death, but does not count towards the recipient’s cap until 12 months after the date of death;
  • Where the pension is not reversionary the value of the pension will be calculated and counted against the recipient’s cap on the date the trustee determines to pay the benefit as a pension. The value will include any investment earnings/losses, expenses etc since the date of death.

If the value of the death benefit pension results in the recipient exceeding their transfer balance cap, the excess over the cap must be commuted from the death benefit pension and taken as a death benefit lump sum. However if the beneficiary commutes part or all of their existing pension before the death benefit pension is counted, the excess amounts can be retained within their accumulation account in the fund.

We’ve only touched on a narrow area of death benefit pensions, there are many other issues that need to be considered in estate planning.

If you need a hand with difficult scenarios please call our team, we can provide  practical solutions for SMSFs. Please contact Mark or Alex on 1300 364 597.

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