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Receiving a Death Benefit from Superannuation versus from an Estate

Written by Michal Lancemore

Being informed by a client of the untimely death of a loved one has prompted my article this week.  What happens when a deceased has no beneficiaries listed on their superannuation or when their beneficiaries are non-tax dependants?  How are their death benefits taxed?  And how will the receipt of death benefits impact your financial position?

In a nutshell, tax of between 15% and 30% will be paid on the taxable component of death benefits.

How much tax is payable, and how it will affect your financial position if you are in receipt of death benefit proceeds, all depends upon whether they are paid:

  • directly via super, OR
  • through the estate

First of all, the definition of a tax dependent for super purposes is as follows, in relation to the deceased:

  • Spouse
  • Child
  • Financial dependent
  • A person who had an Interdependent relationship
  • Legal personal representative

If you fall within the above categories, you can generally receive a superannuation death benefit tax free.

If you fall outside of the above categories, you are considered a non-tax dependent, and tax will apply to the taxable component of death benefits.  This includes Adult children.

The best way to illustrate this is via the following example:

Phoebe (40) is a single parent with 2 children under age 5.  Phoebe earns $46K pa – and is eligible for FTB A + B totalling $15K pa.

Phoebe’s 63 yr old mother Doris just passed away.  Though Doris had not nominated a beneficiary for her super fund, Phoebe is her sole beneficiary and the executor of her estate.

Doris’ death benefit components (including some life insurance) are as follows:

Phoebe potentially has two options:

  1. That the death benefits be paid to her via the superannuation fund
  2. That the death benefits are directed to Doris’ estate and paid out from the estate 

PAID VIA SUPER

Phoebe’s assessable income will increase by the taxable components of the death benefits will have major flow on effects:

  • Medicare levy will apply to her new assessable income of $396K (her income $46K + her mothers taxable death benefits)
  • Her increased income means she will lose the FBT payments
  • Her increased income means she will no longer benefit from the low income tax offset
  • Her increased income will reduce her childcare subsidy
  • She will be liable for Div 293 tax on her concessional super contributions as her income exceeds $250K
  • Her increased income means she no longer qualifies for the government co contribution

PAID VIA THE ESTATE

Phoebe’s assessable income will not change with the distribution from Doris’ estate.  The benefits here are:

  • No medicare levy is payable on the taxable component (as it’s considered income in the trust)
  • Phoebe does not need to report her distribution from Doris’ estate, therefore her income remains unchanged at $46K and she will retain all of her existing benefits.

The point of the article is that estate planning is a specialised area and one that requires expert advice.  Don’t wait until it’s too late – explore your options to help your beneficiaries save some tax!

 

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