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Terminal illness should trigger super review

SMSF trustees and members should contemplate difficult issues, such as what will happen to the money in their fund if they are diagnosed with a terminal illness, as there are tax advantages to consider, a superannuation expert has said.

Speaking at the recent SMSF Association SMSF Expo in Melbourne, PwC private clients director Liz Westover said super does not automatically form part of a person’s estate, and as such would not necessarily be distributed as per the terms of the deceased’s will.

“So if you think there are some risks around that and you are in ill-health, you might think about bringing those monies out of super and gifting them so that you can pull them out directly from super and they don’t get distributed as part of your will,” Westover said.

“Now one of the clauses in the legislation actually says if you’re diagnosed with a terminal illness and you are unfortunately told you have less than two years to live, you can pull all your money out of super tax-free no matter what age you actually are.”

She cited a case where one of her clients who was divorced and was diagnosed with an illness. She pulled her money directly out of super when she was diagnosed and that money came to her tax-free.

The client was then able to gift that money tax-free to her adult children. However, if the super benefits had gone to her adult children from her super fund after she had died, the money would have been taxed at 17 per cent on the taxable component.

“I know it’s a difficult thought to have when you’re diagnosed with a terminal illness and probably one of the last things you’re thinking about, but nevertheless there can be significant tax advantages by pulling that money out of super,” Westover said.

However, she warned the super money would need an alternative investment home, and recommended trustees and members seek professional advice on alternative investment structures with optimal tax arrangements.

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