Nick Bruining, a leading financial expert, has addressed a pressing concern for many Australians: how to avoid your children paying a super death tax after you turn 75. The answers, he warns, are grim but essential for effective estate planning.
Understanding the Super Death Tax
The so-called super death tax refers to the tax that can apply to superannuation death benefits paid to adult children, particularly when the deceased is over 75. In such cases, the benefits are taxed at up to 17% (including the Medicare levy), which can significantly reduce the inheritance.
Bruining explains that the key issue arises because superannuation is a tax-effective vehicle during your lifetime, but upon death, the tax treatment changes. For those under 75, death benefits paid to dependants (including adult children in some circumstances) can be tax-free. However, for those over 75, the benefits are generally taxed, making it crucial to plan ahead.
Strategies to Mitigate the Tax
One grim strategy is to consider withdrawing your super before you turn 75 and investing it in other assets. While this may trigger immediate tax, it can avoid the higher tax on death benefits. Another option is to ensure your super is left to a dependant who is a spouse or a child under 18, as these beneficiaries may receive benefits tax-free.
Bruining also suggests using a reversionary pension, which allows a spouse to continue receiving income after your death, potentially delaying tax liabilities. However, this strategy requires careful consideration of the rules and your personal circumstances.
Estate Planning Considerations
Estate planning is not just about superannuation. Bruining emphasizes the importance of having a valid will and binding death benefit nomination to direct your super to the right beneficiaries. Without these, the trustee of your super fund has discretion, which may not align with your wishes.
For those with adult children, it may be worth considering a testamentary trust, which can provide tax advantages for beneficiaries. However, this requires professional advice and can be complex.
Seeking Professional Advice
Given the complexity of superannuation and tax laws, Bruining strongly recommends consulting a financial adviser or tax specialist. They can help you navigate the rules and develop a strategy that balances tax efficiency with your estate planning goals.
While the answers may be grim, taking action now can ensure your children receive the maximum benefit from your superannuation after your death. Ignoring the issue could lead to a significant tax bill that reduces your legacy.
