Should I consider setting up a Superannuation Proceeds Trust?
Let’s face it – there are 2 things certain in life: taxes and death. There comes a time in everyone’s life when we must think about what would happen if we were to pass, particularly in relation to anyone that may be dependent on us – will they be financially supported after our death? And how will it be ensured?
If you have accumulated a significant amount of funds in your superannuation (or potential funds from life insurance policies), then a Superannuation Proceeds Trust may be something you should consider.
What exactly is a Superannuation Proceeds Trust?
A Superannuation Proceeds Trust is a Trust established to pass on the superannuation funds from a deceased’s funds account to a death benefit dependant.
A death benefit dependant is someone who was dependent on the deceased before they passed, including a:
- Spouse or former spouse of the deceased;
- Child under the age of 18;
- Person with whom the deceased had an ‘interdependency relationship’; and
- Person financially dependent on the deceased just before their death.
An ‘interdependency relationship’ may include one where the deceased and the other party:
- Have a close personal relationship;
- Live together;
- Shared a relationship where the other party was financially dependent on the deceased;
- Shared a relationship of domestic support and personal care; or
- Suffer from a physical, intellectual or psychiatric disability
Establishing an SPT
There are 2 ways an SPT can be established:
- By Will; and
- By Deed, after the death of the deceased (if they were a superannuation funds member).
How would an SPT benefit me?
The biggest advantage of creating a Superannuation Proceeds Trust is the tax benefit that it carries.
Creating a SPT will be particularly advantageous if the dependant you have listed under the SPT is a minor.
The Income Tax Assessment Act enables the income paid by the Trust to dependents under the age of 18 to be taxed at the normal adult tax scale, rather than the penalty child rates (49.5%!) as part of the excepted trust income provisions under the SPT.
This means that they may also meet the tax-free threshold. With this being said, it is crucial that only individuals who satisfy one of the 4 death benefit dependant factors are named under the SPT. This is to ensure that the funds received under the SPT are tax-free.
Other benefits of a SPT include:
- Tax Efficiencies: You do not have to pay additional tax when superannuation proceeds are paid into the superannuation proceeds account.
- Broadness of Powers and Identity of Trustee: A trustee listed under a SPT does not have to be a family member. They can be a professional advisor or someone well-known to you. The trustee is also granted wide powers.
- Long lifespan: An SPT can last up to 80 years in most states and territories in Australia (except for South Australia, which has an unlimited lifespan).
- Protection: If any problems were to arise for your dependants (for example, insolvency or relationship/marriage breakdowns), the funds within the SPT are protected and cannot be accessed by anyone else.
How is a SPT different to a Testamentary Trust?
A Testamentary Trust is similar to a SPT as it also involves the distribution of assets to beneficiaries, but is set up within a Will.
From a tax perspective, it is important to separate a Superannuation Proceeds Trust and Testamentary Trust (TT) established under a Will.
The main reason for this is that death benefit dependants are taxed at the adult marginal rate and may fall under the tax-free threshold.
On the other hand, the TT should list all other beneficiaries who do not fall under the death benefit dependant category.
What if I don’t have any death benefit dependants at the moment?
Life is uncertain and you should always be prepared for any obstacles that may arise in the future. Even if you don’t have anyone that is death benefit dependent on you at the moment, this does not mean that you should completely disregard considering the creation of a SPT.
As discussed above, a death benefit dependant does not only include children under the age of 18. It can also include an individual who was financially dependent on the deceased before they passed – including adult children. If something were to occur which would impact the level of dependency of your child, a SPT can provide financial protection to assist them after your death.