Beware Super Inheritance Traps
Private self-managed superannuation funds can grow to be very big over time, some with millions of dollars in them. But in many cases proper thought hasn’t been given to what will actually happen to the super money in practice when the account holder dies?
Estate Planning lawyer Tony Mitchell of Stacks Law Firm says the New Year is a good time to review your estate plans to accommodate changing circumstances that can have an impact on you and your family.
“Let’s take the example of the fictional family of John and Mary. John is 64 and plans to retire in a few years. His wife Mary is 60 and they have three children – Peter 36, Jane, 28 and Meg 22.”
In this scenario, the couple plan to fund their retirement through their self managed superannuation fund (SMSF) that has accumulated capital of $2 million. They don’t have current Binding Death Benefit Nominations – a written declaration that sets out how their death benefit is to be distributed to their dependents and legal personal representative up their death.
“John and Mary are killed in a car accident. Peter is the sole executor of their Wills and upon their death he assumes control of the SMSF. Peter’s business is in trouble and he faces bankruptcy. Peter uses his position to distribute all of the capital from the SMSF to himself. He can do this as there is no Binding Nomination in place to say how the super money should be distributed after death.
“The story gets worse for Jane and Meg. The parents’ wills left their personal fortunes to their children outright. This means creditors get first bite and they take a huge chunk of Peter’s share of the inheritance. Jane earns a good income and she will have to pay a large part of her extra income from the inheritance in personal tax. Meg lives with a man in a rocky relationship. If they stay together for two years the man may be able to claim part of her inheritance as joint income.
“This would have been different if John and Mary had set up a Testamentary Trust. Peter’s inheritance could have been protected from his creditors, Jane could have achieved significant tax relief, and Meg could have had some protection from claims by her partner.
“So it would be wise to review your estate planning strategies and seek skilled legal advice on what you can do for your particular circumstances. There are legal measures that can be put in place to protect your inheritance and superannuation and make sure it ends up going to the people you intend it going to,” Tony Mitchell said.