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Intergenerational estate planning requires varied pension strategy

Trustees should look to use a dual pension arrangement to achieve better intergenerational estate planning outcomes within their SMSFs, a strategy specialist has proposed.

Specifically, I Love SMSF director Grant Abbott suggested if some of the death benefit originating from an SMSF is to be allocated to the deceased member’s children, then having a pension made up entirely of non-taxable assets and another consisting entirely of taxable assets would deliver the most tax-effective outcome.

“The tax-free pension would be made up of things like the proceeds from the sale of a business through a non-concessional contribution,” he said.

“The advantage of that is if that pension reverts on death to my children and they’re over 25, then effectively, upon reversion, if the benefit is paid from the taxable component pension, it’s taxed at 17 per cent, but if it comes out of the tax-free pension, there is no tax liability for the children.

“Likewise, if a have a pension made up of taxable assets, I’d revert that one to my grandchildren, children under the age of 25, or my surviving spouse.”

Abbott pointed out structuring a fund in this manner can ensure any death benefit proceeds from an SMSF will bypass the deceased member’s estate and therefore be paid out directly to the intended beneficiary.

Further, he noted the aforementioned structure can prevent any pensions the deceased member had from rolling back into the accumulation account of the SMSF, which in turn would have adverse tax implications.

“Having them roll back into an accumulation account would mean any tax-free component would suddenly get muddied up with everything else, so instead of having a lovely 100 per cent tax-free asset pool, I could end up with only 30 or 40 per cent of the assets being tax-free,” Abbott said.


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