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Cash Your Super Before You Die

Cash Before You Die

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Cash your super before you die. Make sure your super is gone by the time you go, unless you have a tax dependant.

Cash Your Super Before You Die

You probably wonder why. Having super is good. Being frugal is good. Leaving super for your children is good. It sounds like a nice thing to do. And it is… but if you don’t cash out in time, your adult children will receive less than you think.

If you wait too long, your super will leave a nasty tax-bill behind. And your children will remember what – your super or the tax bill that came with it? 

But you probably shake your head and remember the terrible time when your spouse died. You had both just turned 65. And back then you received his or her entire super without any tax to pay. So why can’t you do the same for your children? 

Death Benefit Dependant

The answer is just one phrase – tax dependant – also referred to as a death benefit dependant.

Death benefit dependant is the term the ITAA97 uses. Tax dependant is the colloquial term most people, including the ATO, use. Two different words. Same thing.

As a spouse you qualified as a tax dependant. A spouse, a child under 18 as well as anybody in an interdependency relationship with or financially dependent on the deceased is considered a tax dependant. And tax dependants receive the lump sum death benefit tax-free. 

But your children are neither under 18 nor live in an interdepencey relationship with or are financially dependant on you. So they don’t qualify as tax dependants. And so they will pay tax on any taxable component that comes their way.

Sole Purpose

This concept of a tax dependant links back to the sole purpose of superannuation. Its sole purpose is to provide for your retirement and/or your tax dependants when you no longer can. For that purpose your super received massive tax concessions over the years.

But anything that is left over when you die without tax dependants clearly wasn’t needed for your retirement or tax dependants. So the legislator wants those concessions back.

Those concessions were never intended for your financially independent children. And so they charge your adult children a so-called ‘super death tax’. So this is why you need to cash your super before leaving it to a non-tax dependant.

Cashing Super

Cashing your super just means moving it out of the super environment. You do this by paying a member benefit to yourself – be it as a pension or a lump sum. 

A lump sum payment can be in cash. But a lump sum can also be in specie. So you don’t sell the asset, but transfer the title from the corporate trustee to yourself.

When To Cash In

But picking the right time to cash your super is not easy. Here are six factors to consider, some predictable, some impossible to predict.

# 1   Family Situation

While your children are little and your spouse alive, you have plenty of tax dependants. So you don’t need to worry about super death tax. You need to worry about life insurance.

But when your spouse has passed away and all your children are financially independent, then super death tax is an issue, since you no longer have any tax dependants.

# 2   Taxable Components

Your super consists of a tax-free and taxable component but either might be nil. 

If your entire super is in the tax-free component, you don’t need to worry about super death tax. None of your beneficiaries will pay any tax on your super. 

But if most or all of your super is in the taxable component, then a 30% tax rate for any untaxed and 15% for any taxed element looms large over your non-tax dependants.

# 3    Marginal Tax Rate

The higher your marginal tax rate, the more you save by leaving your super in your fund. If your marginal tax rate is 45% tax + 2% Medicare, then leave your super where it is as long as you can.

If you have no other income and your super earnings are under the tax-exempt threshold, then you pay no tax anyway – be it within super or outside of super. So then you might as well take it out.

# 4   Timing

It is difficult to get the timing right. If you cash your super too early, you might pay more tax outside of super than your beneficiaries pay in death tax.

But if you don’t cash your super before you die, you might waste part of your family’s legacy on super death tax. 

# 5   Capital Gains Tax

When you die, your SMSF must either sell the assets and then pay cash or transfer the title to pay in specie. Either way – sale or transfer – you are looking at a CGT event and hence a potential realised capital gain.

While you are alive and in pension phase, a realised capital gain isn’t an issue since your super is exempt from tax anyway. But once you are gone, a realised capital gain might result in a large tax bill for your children to deal with.

# 6    Fate

Call it fate, destiny, divine intervention or something else.  Accidents happen. Nobody knows how much time they have left.

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So these are six factors to consider to work out whether and when you should cash your super. If you get stuck, please email or call us. There might be a simple answer to your query.

 

MORE

Minimum Pension Payments

My Super When I Die

SMSF To Do List

 

Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation

what happens to my super when i die

My Super When I Die

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What happens to my super when I die? Did you ever ask yourself this question?

My Super When I Die

Your super is for your retirement. But what happens to the super you leave behind?

Compulsory Cashing

While you are alive, there is no requirement to cash your super.  When you meet a condition of release, you are free to cash it, but you don’t have to. You could just leave it all in accumulation and not touch a cent. Or move it to pension and only withdraw the minimum pension payments.

All this changes when you die. Your death is a compulsory cashing event – the only one in super. It means that the remaining balance in your member account needs to go somewhere – be it as a pension or a lump sum. Your super accounts can’t continue as if nothing happened.

Reg 6.21 SIS Reg: (1)  …a member’s benefits in a regulated superannuation fund must be cashed as soon as practicable after the member dies.

Benefit Payment

Other types of trusts distribute capital and income, but superannuation doesn’t make this distinction. Super funds – even though they are a type of trust fund – only pay benefits – be they member benefit or death benefit payments. 

While you are alive, your super is yours. Any super payments go to you. And so this is called a member benefit.

Once you have passed away, paying you is no longer an option. And so your super is paid to others. This is called a death benefit payment.

So there is a simple answer to your question, “What happens to my super when I die?” It will all be paid out as a death benefit.

But the tricky bit is who, how and when? The devil is in the details. There are 4 questions you need to ask to get an answer.

Question # 1    Who?

Who gets your super depends on six factors. Some outside of your control. Some within. 

1 –  SIS Act

The SIS Act sets the framework. Your super can only go to your SIS dependants or your estate. 

Your SIS dependants per s10 SIS Act are your spouse or de-facto spouse (but not a former spouse) and all of your children. No matter what age. As well as anybody in an interdependency relationship with you. An interdependency relationship means that you lived together and one depended on the other for practical support and care at the time of your death. 

And then there is one other group that qualifies as your SIS dependant, although not specifically mentioned in s10 – anybody financially dependent on you at the time of your death.

Your super goes to your SIS dependants and / or your estate. But to what extent – who gets how much  – the SIS Act doesn’t say. So you look further.

2 – Trust Deed

Every super fund has a deed. And this deed sets out what trustees can or can’t do with the super in their care.  A deed might allow or prohibit a reversionary pension, a binding or non-binding death benefit nomination or something else. Or it might be silent on any of these points.

A trust deed just says what COULD happen to your super. It doesn’t say this WILL happen. So you look further.

3 – Trustee’s Discretion

And then you might leave it at that. You might do nothing or make a non-binding death benefit nomination. Either way, you let the surviving trustees decide after your death – within the SIS Act and trust deed – who gets how much of your super.

4 – Specific Instructions

Or you take control.  You make your pension reversionary or sign a binding death benefit nomination – provided SIS Act and trust deed allow you to do so.

Making your pension reversionary means that your pension doesn’t stop upon your death but reverts to the reversionary beneficiary when you die.

A binding death benefit nomination will force the trustee to distribute your super as stipulated in the binding nomination,

5 – Testamentary Will

To the extent that your super ends up in your estate, it will only be distributed according to your wishes if you have a will that covers your super. If you don’t, then your legal personal representative (LPR) will decide who gets your super.

6 – Choice of Trustee

You can have the best legal set up in the world, possession is still 1/10th of the law.  If you don’t want somebody to get your super, don’t bring them into your SMSF.

Question # 2    How and When?

When you die, your super needs to go somewhere else. It usually gets cashed out as a lump sum, leaving the low-tax zone that super is – the legislator’s preferred option.

But under certain conditions your super can stay within the super environment and just move as a pension to another super account. The legislator doesn’t like this option one bit, so they put four measures in place that make it much harder to keep your super in the super zone.

1 – Selected Few

Only a selected few of your SIS dependants can receive their death benefit as a pension per reg 6.21 (2A) SISR and hence stay within the low-tax zone. Your spouse can. Anybody in an interdependency relationship with you can. Any of your minor or disabled children can. And any adult child under 25 and financially dependent on you can as well until they turn 25.

But your financially independent adult children can’t. They can only receive a death benefit lump sum from your super. And that means the assets leave the low-tax zone.

2 – Cap on Pensions

Pension accounts enjoy a 0% tax rate, but are capped at $1.6m – the transfer balance cap (TBC). So just because a SIS dependant qualifies to receive a death benefit pension from you doesn’t mean they can. 

Let’s say you started a reversionary pension on 1 July 2020 worth $1.6m and died that day. Your spouse  – with a transfer balance account (TBA) of $1m so far – receives your reversionary pension. To comply with the TBC, they can only credit $0.6m to their TBA and need to cash the remaining $1m.

3 –  No Accumulation

Whenever your super can’t move into a beneficiary’s pension account, it needs to be paid out. It can’t move into a beneficiary’s accumulation account. If it could, your super could stay there forever – passing from generation to generation – forever enjoying a low 15% tax rate in accumulation.

So in the example above, your spouse can’t move the excess $1m into accumulation, but needs to cash it out as a lump sum.

4 – No Mixing

To track compulsory cashing, you need to keep a death benefit pension separate from other pensions, so that means separate pension accounts.

Question # 3    How Much Tax?

There is no inheritance tax in Australia. But your non-tax dependants pay ‘super death tax’ on the taxable component of your super. How much depends on the following:

1 – Tax Dependants

Your spouse – including any former spouse – your children under 18 as well as anybody financially dependent or in an interdependency relationship with you are your tax dependants. Anybody else – including your financially independent adult children – are not.

2 – Taxable Components

Any super benefit consists of a tax-free and a taxable component. Tax-free components pass to beneficiaries tax-free. Taxable components trigger super death tax if paid to non-tax dependants, usually at 15%.

A taxable component consists of a taxed and an untaxed element. For most Australians the untaxed element is nil, but if it isn’t, it is taxed at 30%.  The rest – any taxed element – is taxed at 15%.

3 – Look Through Approach

Tax law applies a look-through approach.  Whether a beneficiary receives the death benefit directly (from your fund) or indirectly (via your estate) doesn’t change how the benefit is taxed. But it might affect whether the Medicare levy applies or not.

Question # 4   And Your SMSF?

If there is at least one other member, your SMSF will continue life as usual after you die. But if there isn’t, what then?

If your SMSF has no corporate trustee, then your SMSF will cease to exist once all assets are paid out.

If your SMSF does have a corporate trustee, then the loss of a director – even if you are the sole director – does not end a company and hence does not end your SMSF’s corporate trustee as such. But with no fund assets or beneficiaries left, the fiduciary relationship ends and your corporate trustee becomes an empty shell.

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So this is what happens to your super when you die. It is all in your hands if you want it to be.

If there are two things you take away from this article, please let it be this:

1 – If you want your super to go to your adult children, take it out of super before you die. If you don’t, your children will pay super death tax.

2 – Only do an SMSF with somebody you want your super to go to. It will save your intended beneficiaries a lot of headaches.

And one last thing in parting. You might hear the term ‘death benefit dependant’. This is the official term in s302-195 ITAA97 for a tax dependant. 

MORE

Minimum Pension Payments

SMSF Legal Framework

SMSF To Do List

 

Disclaimer: numba does not provide personal financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.

 

Liability limited by a scheme approved under Professional Standards Legislation