3 things you need to know about the impact of new Super rules on your estate plan
In a 1789 letter Benjamin Franklin wrote that “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes”. Similar quotes are attributed to Christopher Bullock, The Cobler of Preston (1716), Edward Ward, The Dancing Devils (1724), and Daniel Defoe, The Political History of the Devil (1726).
And to steal a line from Margaret Mitchell: There’s never a convenient time for any of them.
Recent changes to Super rules mean we need to review how estates are structured. This is because of the new $1.6 million dollar cap and the knock on effect for estate planning. Without careful structuring it can be easy to fall into a trap of paying taxes such as Capital Gains Tax, super taxes and having a dysfunction estate at a time when the family is vulnerable.
What has changed?
Changes were made to super on 1 July 2017 that affect super contributions and the way super and retirement income is taxed.
One of the biggest changes was a reduction in the amount of non-concessional, or after tax, contributions that an individual can make over a year.
People make non-concessional contributions because, once the money is within the super fund, earnings from the investments are taxed at the discounted rate of 15 per cent, or not taxed at all once the person retires or enters the pension phase.
The new restriction called the transfer balance cap means you are restricted to only having a balance of up to $1.6 million in your superannuation pension.
The cap does not mean that people necessarily have to pull excess money out of super altogether. The impact of the cap is on the tax – earnings on accumulation funds are taxed at 15% versus zero tax on the pension phase, which is still very attractive.
What are some of the issues to consider?
The underlying objective of an asset and estate plan is to generate wealth and then to quarantine assets to ensure that they remain available for distribution as you wish, and are not exposed to the risks of the commercial world, differing needs of family members or excess tax paid both now and in the future.
3 ways to make the most of the super changes:
- Typical estate plans for a couple are on the death of one spouse assets pass to the surviving spouse, then through Testamentary trusts to children on the death of the survivor.
- A good estate plan not only passes assets to those who you want to but does it as seamlessly as possible, with little roadblocks caused by probate stuck in the courts and minimising potential challenges to the estate.
- For younger families the main part of the estate maybe held as life insurance inside superannuation and the strategy needs to be reviewed depending on circumstances of the family including dependent children.
In any scenario we need to revisit what options are available and how best to structure to get the desired outcome.
For higher net wealth clients, we have found that those who use a combination of a super fund and a Family Trust tend to have the best outcome over the long term – as they are able to make the most of certainty, flexibility and tax effectiveness.
Despite the changes super remains a very attractive solution for those looking to make the most of the money they are currently making and the opportunities they have and to look after their family and loved ones, now and into the future.
We offer A Second Opinion for high income earners who want an objective, high level review of your current financial plans; to ensure that your super plans truly meet your needs and your goals in a period of changing legislation, increased restrictions and government meddling.