A big part of a financial planner's role is to minimise the tax you pay as much as possible, this even includes the tax your loved ones will on the assets you leave behind when you pass away.
Who your superannuation or pension account benefits go to when you pass away will determine how these assets are treated tax-wise.
For example, if the money were to go to your spouse or young children, who are considered to be your dependent beneficiaries, they would pay no tax on the whole amount.
On the other hand, if the money were to go to a non-dependent beneficiary, such as adult children who fund their own life, they will pay no tax on the tax-free component but will have 17% tax payable on the taxable* portion of the benefit.
*
The taxable component may include a taxed and/or untaxed element depending on the situation. But we will focus on the taxed element only.There are 2 main strategies used to minimise the tax payable of a non-dependent death benefit recipient.
- Withdraw entire balance.
- If you are aware that you will pass away very soon, you could withdraw your entire superannuation/pension balance and leave it as cash in a bank account to pass onto your chosen recipient.
- Recontribution strategy.
- This is where you would withdraw from your superannuation account and recontribute it back in from age 60 up until retirement.
- For example, In the last 5 years of your working life, from 60 to age 65, you take $100,000 out of superannuation and recontribute it back in as an after-tax contribution. By doing this, the components of your superannuation change, increasing the tax-free component by $500,000 and decreasing the taxable component by $500,000 over this 5 year period. That is an $85,000 (17% of $500,000) instant tax-saving for your non-dependant beneficiary!
- If you attempt to do this prior to age 60, you will most likely receive a tax payable surprise, so the timing is important.
- If you are working past age 65 and meet the relevant work test, you can continue to use this strategy up to age 75.
- The strategy does have conditions that need to be met and they do change along with legislation changes, therefore, the strategy will need to be looked at alongside a financial planner to see if it fits your situation.
Death may be a topic you'd rather avoid, but I'm sure you'll be much happier knowing that you can save your loved ones thousands of dollars worth in tax.
