Structuring your affairs now to minimise tax on your loved ones later
3 July 2023
When it comes to estate planning, one aspect that’s worth considering is how to structure your affairs in order to reduce any potential tax payable by your loved ones on the inheritance they receive.
While Australia doesn't have inheritance or estate taxes as such, assets that beneficiaries receive can still have tax obligations. If you have superannuation for example, there may be tax payable on amounts paid to non tax-dependants, such as adult children.
Luckily, you can navigate this problem through a strategy known as recontribution. Read on to learn more about the tax implications of superannuation and how a recontribution strategy can help you reduce potential taxes payable by your non tax-dependent beneficiaries upon death.
Understanding the tax implications of superannuation upon death
Two main tax components comprise a superannuation balance - the taxable component and the tax-free component. The taxable component consists of employer contributions and amounts of salary sacrificed to super as well as the earnings on these contributions. The tax-free component represents the remainder of your super balance and consists of contributions made from income after tax has been paid on them.
When death benefits are paid as a lump-sum to tax dependents there is no tax payable. For non-tax dependants, however, tax will only be payable on taxable components, at a rate of either 15% (plus Medicare Levy) or 30% (plus Medicare Levy) depending on whether they are classified as taxed or untaxed.
Exploring recontribution strategies
In simple terms, a re-contribution strategy involves taking money out of your super account once you have met a condition of release and contributing it back. When you withdraw the lump sum, you pay any necessary tax on it before contributing it back as a tax-free non-concessional contribution, presuming you remain eligible to do so. This way, you can reduce the tax payable on any lump-sum death benefits that are left to non-tax dependents.
By withdrawing money, paying taxes on it, and contributing it back, you reduce the taxable component of your super death benefit and increase the tax-free component, thus reducing any potential tax burden on your non-tax dependent heirs.
Let's take the example of Ashley, a 66-year-old widower with $800K in her superannuation account, who decides to withdraw and recontribute $330K back in to her superannuation account. Please note, this scenario assumes Ashley has the full 3-Year bring forward Non-Concessional Cap of $330K available to her and uses a 17% tax rate which includes 2% Medicare.
After $300K Re-contribution
Starting Super Balance
Tax payable upon death*
Reduction in potential Death Benefits Tax^
*$560K x 17% and $329K x 17%
^$95,200 - $55,930
This example shows that Ashley can minimise potential death benefit tax payable by her non-tax dependents by $39,270 by simply withdrawing and re-contributing $330,000 to her Superannuation account.
Estate planning strategies to minimise tax
Other ways to minimise tax obligations for your loved ones include:
Gifting: By satisfying a Condition of Release, you are free to withdraw funds from Superannuation, pay any applicable taxes and gift these amounts to loved ones. While the financial gifts themselves will not incur any tax, any subsequent income and capital gains earned on these funds will be subject to tax at the recipient's marginal tax rate.
Establish a testamentary trust: A testamentary trust is a discretionary trust written into your Will that comes into effect upon death. The trust provides asset protection benefits and allows income and capital gains to be distributed in a tax-effective manner.
Engaging a financial adviser: When it comes to estate planning, engaging with a financial adviser is essential. A financial adviser understands the superannuation and estate planning strategies that are available to help reduce the potential tax burden on beneficiaries and they can work with the relevant estate planning specialists to obtain the most effective outcome for you and your family.
The main benefits of estate planning
Aside from getting help with structuring your affairs to minimise tax on your loved ones later, estate planning with the help of a financial adviser has many other benefits.
The main ones being:
Control over asset distribution: This is your chance to dictate who gets what in the event of your death, making it easier for your family to divide your assets and property when the time comes - and reducing the likelihood of disputes among family members.
Peace of mind: Structuring your affairs in a way that suits you and your loved ones as well as knowing that your wishes will be carried out in the event of death can alleviate stress and anxiety. While it’s not a fun topic, it’s important to put some thought into it while you have the chance.
Protection of assets: Estate planning protects your assets from creditors, lawsuits, and other potential threats. The use of legal tools like trusts, can shield your assets from outside forces, ensuring they are passed on to intended beneficiaries.
Caring for loved ones: By setting up trusts or appointing guardians, you can provide for the ongoing care of minor children, elderly or disabled relatives, or other loved ones who may require special attention long after you're gone.
How Findex can help
For help structuring your affairs, you cannot underestimate the value of ongoing financial advice, from reliable, qualified experts like Findex. Findex can help protect your legacy, which you've spent a lifetime growing and building, so it isn't taxed away, leaving your loved ones in financial hardship.
We can help with wealth management for families, tax advisory, and other aspects of estate planning. We understand how important planning your estate is in ensuring your beneficiaries access your inheritance and how minimising tax obligations help your loved ones to receive your assets with as fewer deductibles as possible.
Get in touch with us today for help with estate planning as well as other wealth management services.
See Disclaimers and Disclosures information.