Leaving Your Wealth to Loved Ones? The Super ‘Death Tax’ Could Take a Chunk—Here’s How Financial Advice Can Stop It.
Why Is My Financial Planner Asking About My Estate Plan? What’s It Got to Do with Them?
It’s a common question: “Why does my financial planner need to know about my estate plans? Isn’t that my lawyer’s job?” It’s understandable to wonder! While estate planning is a legal matter, your financial planner plays a vital role in ensuring your finances are structured to support your loved ones after you’re gone.
One key reason is superannuation. Did you know your super doesn’t automatically form part of your estate when you pass away? This can create tricky situations regarding taxes—especially when it comes to tax on super death benefits.
Without the right planning, your beneficiaries could receive much less than you intended due to unexpected taxes.
So, how can you ensure your super goes to the people you want with minimal tax implications? Let’s break it down by looking at what your super consists of and the steps you can take to reduce tax for your loved ones.
Who Can Receive Your Super Tax-Free?*
Superannuation law sets out who a death benefit is payable to, while taxation law sets out how a death benefit is taxed. Understanding who qualifies as a tax-free beneficiary is crucial for your estate planning. Here’s a quick breakdown:
Tax-Free Beneficiaries:
Spouse: Your husband, wife, or de facto partner.
Children: Any child under 18 years old or any adult child who is financially dependent (for example, has a disability).
Taxable Beneficiaries:
Adult Children: If your children are over 18 and not financially dependent.
Other Non-Dependants: Any other individuals, such as friends or distant relatives.
The Two Components of Your Super: Taxable and Tax-Free
Your superannuation balance isn’t just one lump sum; it’s divided into two parts, each with different tax rules. Understanding these components is essential for minimising taxes on what you leave behind.
Taxable Component
What It Is?: This part includes your pre-tax contributions (like employer payments and salary-sacrifice contributions) as well as any investment earnings that accumulate in your super fund.
Why It Matters: While any withdrawals from this component are tax-free once you turn 60, if this balance goes to non-dependants (like adult children) after your passing, it can be taxed at 15%. This could mean up to $150,000 in tax for every $1 million paid out, significantly reducing what your loved ones receive.
Tax-Free Component
What It Is: This component consists of your after-tax contributions—money you’ve already paid tax on before adding it to your super.
Why It Matters: Withdrawals from this part are always tax-free, which is beneficial for non-dependant beneficiaries since they won’t pay any tax on the tax-free component if they inherit it.
Strategies to Reduce Tax for Your Beneficiaries
With the right planning, you can ensure that more of your super goes to your loved ones instead of the tax office. Here are a few key strategies to consider:
Understand Your Super’s Taxable and Tax-Free Split: Check your super statement, which should show the taxable and tax-free portions of your balance. Knowing this breakdown can help you plan how to minimise taxes for your beneficiaries.
Think Carefully About Who Gets What: Super doesn’t automatically go to your estate, so it’s crucial to make the right beneficiary nominations. For instance, nominating a dependent (like a spouse or a child under 18) can help avoid tax. But if you want your adult children to inherit, they could face that 15% tax, so consider your options carefully.
Use Estate Planning Alternatives: In some cases, directing your super to your estate can reduce tax by avoiding the Medicare levy. This can be beneficial if you want adult children to benefit from your super, but it's essential to get advice to ensure it aligns with your overall estate plan.
Consider Reducing Your Super Balance: Once you reach preservation age or 65, you can withdraw money from super and reinvest it personally, which might help reduce future super taxes. However, remember that these funds will lose the special tax treatment that super provides. This strategy might be especially relevant if you're nearing the proposed $3 million cap, which could incur higher taxes on super above that amount.
Superannuation Recontribution Strategy: This strategy involves withdrawing some of your super and then recontributing it as a non-concessional (after-tax) contribution. By doing this, you can increase the tax-free component of your super. This is particularly useful for those approaching retirement, as it can help ensure that more of your super remains tax-free for your beneficiaries, reducing the potential death benefits tax.
Plan for the Long-Term: Health and life expectancy are important factors to consider. Some individuals withdraw their super balance to avoid the death benefits tax, only to end up living much longer than expected, ultimately paying more tax over time than if they had left it in super. Balancing tax savings with your financial needs is essential.
The Bottom Line: Planning Makes a Big Difference
So yes—your financial planner needs to be involved in your estate planning, especially regarding superannuation. Advisors are here to ensure your hard-earned money supports your loved ones the way you intend.
At Lush Wealth, we help you see the full picture, guiding you through strategies to grow and protect your wealth for future generations. If you’re ready to take your financial planning seriously, let’s discuss how we can work together. Book a 15 Minute Clarity call to get started.
What you need to know
This information is provided and produced by Lush Wealth. The advice provided is general advice and information only, as we did not consider your investment objectives, financial situation or particular needs in preparing it. Before making any financial decision based on this information, you should consider how appropriate the advice is to your particular investment needs and objectives. You should also consider the relevant Product Disclosure Statement before deciding on a financial product.