Super Reforms – Reversionary Pensions (cont)
Death benefit pensions payable to children (to age 25) have special rules.
A child’s transfer balance cap is generally determined by the value of the deceased’s retirement phase assets that they receive. It will depend on:
whether the child started to receive the pension before 1 July 2017;
if they started to receive them after that time, whether or not the deceased had a transfer balance account at the time of their death; and
if so, whether the deceased had an excess transfer balance in the retirement phase at the time of their death.
If a child is already receiving a pension on 1 July 2017 the child’s transfer balance cap is $1.6 million. Any balance in excess of this must have been dealt with by 30 June 2017.
If the deceased parent did not have a transfer balance account (i.e. was still in accumulation) at the time of their death – and they died on or after 1 July 2017 – the child’s cap is their proportionate share of the general transfer balance cap.
Craig dies with accumulation assets worth $2 million. His 12 year old daughter Eliza is the sole beneficiary of his estate. As there are no other beneficiaries, Eliza’s share is 100 per cent of the general transfer balance cap. Eliza can take $1.6 million of the $2 million as a superannuation death benefit pension. The remaining $400,000 would need to be paid to Eliza as a lump sum and removed from the superannuation system.
Where there are multiple beneficiaries the transfer balance cap is apportioned. If Eliza had a brother, Jack, who was to share equally with Eliza in Craig’s benefits, their transfer balance cap would be $800,000 each. This means they could each start a pension with $800,000 but would also need to take a $200,000 lump sum.
Curiously, if the parent had a retirement phase benefit (a pension) and an accumulation account only the pension balance is applied to the child’s transfer balance cap.
Damien dies with a pension of $1.3 million and an accumulation account of $400,000. Damien’s two children, Alyssa, 15, and Zali, 13, are his sole superannuation beneficiaries and are to receive equal benefits. Alyssa and Zali each have a transfer balance cap of $650,000 (1/2 the pension balance) and can only draw a pension to that limit. They also receive $200,000 each from the accumulation account which must be withdrawn from the fund.
Where the deceased parent has an excess transfer balance a child’s transfer balance cap is reduced by their proportionate share of their parent’s excess.
Thomas has a reversionary pension worth $1.7 million, a personal transfer balance cap of $1.6 million and a transfer balance account of $1.8 million. This means he has an excess transfer balance of $200,000.
On his death Thomas’ pension reverts to his son, Bruce, who is aged 16. Bruce’s transfer balance cap is set at $1.5 million (the value of the $1.7 million pension less Thomas’s $200,000 excess transfer balance). Thomas will need to draw the $200,000 as a lump sum.
A child’s transfer balance account ceases when they are forced to commute their superannuation income streams at the age of 25 – or earlier if the benefit is exhausted. If the child continues to receive the pension after age of 25 because they have a permanent disability, their transfer balance account ceases when their benefit is eventually exhausted.
These changes require a careful rethink of your clients’ estate planning requirements and underlines the importance of alternative structures such as testamentary trusts.