SMSFs need to rethink estate planning in light of Transfer Balance Cap

Many SMSFs and their advisers are “blissfully ignorant” of the implications of the Transfer Balance Cap upon death, and need to rethink their estate planning, says the SMSF Association.

SMSF Association Head of Technical Peter Hogan said that SMSF members should seek specialist advice on the potential impact of receiving a pension on the death of their spouse. He said that assets supporting such a pension are counted towards the surviving spouse’s Transfer Balance Cap, current set at $1.6 million.

“The end result can be that where an SMSF is paying pensions to two spouses who are comfortably within their respective TBCs of $1.6 million, and one of them dies, the surviving spouse can suddenly exceed their TBC,” said Hogan.

“It is an outcome of the new superannuation regime that has received little attention and the Association is concerned that many SMSF members and their advisers are ‘blissfully ignorant’ of the impact of these changes regarding the payment of death benefits.”

Hogan said that it’s wrongly assumed that any excess over the $1.6 million Transfer Balance Cap can be automatically moved back into accumulation phase.

“This is wrong. The rules for death benefits have changed in that any excess above the recipient spouse’s $1.6 million cap ‘inherited’ because of the death of a spouse must be paid out of superannuation as a lump sum; transferring it to an accumulation fund is not an automatic option under the new regime.”

“Although it is possible to plan to influence this outcome, SMSF members need to receive specialist advice addressing their fund’s particular circumstances to get the best possible result.”

“This may mean that members who have addressed their estate planning needs in the past will need to review those plans in the light of the changes that took effect on 1 July 2017.”

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