How do I use superannuation to minimise taxes, protect and build wealth and provide tax-effective benefits for me and my family in my retirement and on my death?
Superannuation is now an important part of all wealth-building and retirement strategies.
For many business owners, farmers, executives and professionals, the “do-it-yourself” or “private” super fund now sits alongside the family trust as a key investment structure.
DIY funds long ago ceased to be the exclusive preserve of the elite.
When we ask people why they bother to set up a private DIY super fund, the most common answer is that they want to have more “control” over their retirement savings. When referring to “control”, they are invariably referring to control over the type of investments they make – they are talking about control over how they build wealth within super. For example, they may wish to buy a business property, or invest in certain shares.
However, what is less appreciated is the potential loss of control over succession issues associated with wealth within a DIY fund. Often, too little attention is paid to issues associated with passing control of the fund, and how the wealth is going to come out of the fund. This includes consideration of the trustees of the fund, the reversionary terms of pensions paid by the fund, and the structure of death benefits paid by the fund.
Not only is there a commercial risk of loosing control of the wealth within the fund, but you may also loose access to tax benefits through lack of appropriate super succession planning.
Consider the following facts:
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You do not have complete ownership of the assets in your super account. This is because a super fund is a “trust”. In the absence of an effective binding nomination, the trustee has wide discretion as to who gets your super entitlement on your death. This applies to both public funds and private DIY funds. You should ensure that you have given a valid binding direction to your trustee. If you have a DIY fund, you should also ensure that the Fund Deed provides for such binding nominations. Binding nominations are not just for public super funds, they are equally relevant to private DIY funds.
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You generally can not specify who will get your super entitlements in your Will. This is because your super entitlement does not form part of your “personal estate”. It may be possible to have your super entitlement paid to your executor on your death, and then dealt with through your Will – but this is not the default position. Furthermore, this may not produce the best tax outcomes for your beneficiaries. You need to specifically address this issue.
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It is common for DIY funds to have either family members as individual trustees, or a company trustee, with member directors. If you are an individual trustee, you cease to be a trustee on your death. Your executor is not necessarily appointed as a replacement trustee. Accordingly, on your death the remaining trustees may gain control of your super entitlements. If you have not given them a binding direction as to where to pay your entitlement, they can pay the benefit to who they like. This may not be a problem if the other sole trustee is your spouse – and you intend for your spouse to have the entitlement. However, problems do arise when there is a spouse and two children as trustees. Problems also arise when control over a “$2 company” trustee passes to an unintended beneficiaries (for example children), who then effectively gain control of the super entitlements - at the expense of your spouse.
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One of the biggest assets in a super fund at the time of your death may be the proceeds from a life insurance policy. Life policies are often held in a super fund because the funding of the premiums becomes effectively tax deductible (by way of the treatment of certain contributions to fund the premiums). You need to consider for the tax treatment of life policy proceeds, and the tax consequences of paying the proceeds from the fund.
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If you are receiving a pension from your fund you need to carefully plan the terms of the pension to ensure that the pension, or the assets supporting the pension, revert or commute to the appropriate person – both for commercial and tax purposes.
Taking a proactive approach to superannuation planning, in conjunction with wider Personal Estate and Business Succession Planning, can yield significant commercial and tax benefits both while you are alive, and for your beneficiaries when you die.
A Mid-life Legal Check-up™ will provide you with a structured way to work through these issues:
- To identify which issues are relevant for you; and
- To provide you with a complete plan to ensure your affairs are in order.
