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Superannuation Exit Strategy: Navigating Changes in Death Bed Withdrawals

Writer's picture: Chris ParkerChris Parker

Superannuation – Death bed Withdrawals – should we ?


Many people are unaware that when you pass away and leave your super to your non-dependent children as a lump sum, they may be liable to pay tax on that super death benefit?


To save or minimise this tax liability, some people who have been diagnosed with a terminal illness decide to withdraw their super in full, just prior to their death and have it deposited into their personal bank account. 


At first glance, this may come across as a tax minimisation arrangement. Given the uncertainty around the timing of death, even with a terminal diagnosis, it can be difficult to plan for. But given many Australians die with a substantial amount left in their super account, it’s a strategy worth exploring if you find yourself in these difficult circumstances. 


If your estate, non-dependent children, or any other non-dependent beneficiaries ultimately inherit your super death benefit, then there are ways to minimise their tax liability and keep the Australian Taxation Office (ATO) onside.


Most people want to leave their superannuation entitlements in the superannuation environment for as long as possible to maximise the tax concessions provided to superannuation funds. However, if those entitlements remain in the fund following that member’s death, the tax implications can be substantial, particularly compared to a withdrawal while the member is alive.


There can be a fine line between a (potentially tax free) member benefit and a (often taxable) death benefit. The tax legislation defines the difference as being:


  1. on the one hand, a payment to you because you are a member of the fund; or

  2. on the other hand, a payment to you, after another person’s death, because that other person is a member of the fund.


A death bed member withdrawal can fall either way, depending on how it is implemented.


What issues should be considered?


For anyone considering the implementation of a death bed member withdrawal, below is a list of some issues to consider:


  1. Who will be making the request? Will it be the member themselves or their Attorney (under an Enduring Power of Attorney)?

  2. What are the assets we are intending to transfer to make the benefit payment? Will these be paid out in cash or will assets be transferred in to the recipient ?

  3. Can the member withdraw their benefit while they are alive?

  4. What will the impact be on the member’s estate planning? Does the member’s Will direct their superannuation differently to their superannuation documents?

  5. Does the payment before death expose the superannuation to the risk of an estate challenge, while leaving it in superannuation may keep it away from one?  (This is a very important consideration).

  6. Will the member lose insurance entitlements?

  7. Does the member have an accumulation account or pension account? How will the member payment be treated in respect of these accounts?

  8. What are the tax and duty consequences for the fund and the member in making the proposed benefit payment?

  9. What does the trust deed say? Will it allow us to do what we want to do?

  10. What can we do now to make the work we need to do later easier?


Conclusion


The tax consequences of getting a strategy like this wrong can be substantial.


The timing of the withdrawal request is critical.  Generally, if the request is made to the Fund and the benefit is paid before death then this will not be a Death benefit and not taxable.  If the request is made before death but processed and paid after death then (unless the fund was blissfully unaware of the member’s death) it will be a death benefit and taxable.


The ATO has raised concerns about undated but signed benefit withdrawal forms being used to argue that a benefit payment made after the death of the member should be treated as a member benefit rather than a death benefit.


“The view of the ATO is that the signed but undated requests are not, of themselves, sufficient to make a subsequent benefit payment a tax-free member benefit. This is because the signed and undated benefit withdrawal request has not been authorised by the member before their death,”


“If the member has authorised the benefit withdrawal before their death by both signing and dating the request and trustee authorisation has been obtained, then the subsequent payment of the benefit after the death of the member but pursuant to that trustee authorisation should not cause the benefit payment to be treated as a death benefit.”


Finally, if a member is not able to exercise their role as trustee in respect of the payment immediately before their death, it is likely this will have to be done by their attorney.


“The power of attorney should specifically give the attorney the right to request the payment and in SMSFs to ensure that the attorney is empowered to become a trustee of the fund or trustee/director so that the payment can be authorised,”




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