Till death, duties and taxes do us part

Losing a loved one is a tragic thing, paying tax is a disaster.

Losing a loved one is a tragic thing, paying tax is a disaster.

It is obviously a very traumatic time when a loved one passes away. The last thing on your mind is your financial situation as you make arrangements for the funeral and enter a period of grieving.

However, decisions that you make now may affect the amount of tax you have to pay for the rest of your life. Paying extra tax could turn the tragedy into a disaster.

The best way to explain this concept is by way of an example. Let us say that James took early retirement at the age of 55 on the recommendation of a doctor. He had $600,000 invested in superannuation and decided to take allocated pensions out for $450,000 split between himself and his wife (using spouse contributions). The remaining $150,000 was left in an accumulation fund.

His wife, Sarah, continued her part time work, being two days a week at the local library.

Tragically James passed away at age 63 leaving Sarah and two adult children. Sarah decides that as she is now 64, this is a good time to retire from her job. However, she is worried that she does not have enough money to live off. This is particularly worrying as she wants to make the most of her retirement including taking an overseas holiday with her sister to take her mind off things.

Sarah knows that her allocated pensions have been performing well and hence decides to continue with them. She tops them up by rolling the accumulation monies in with her husband’s allocated pension which is to be transferred to her.

She is also concerned about her money lasting her lifetime and decides to draw down only the minimum from her allocated pensions.

Issue

Sarah has a substantial sum to live off, however this could be reduced by tax. She has made investment decisions to continue with and add to her allocated pensions but would she be better off seeking some financial advice before making this decision?

Solution

Sarah should have sought advice from her financial adviser. In fact, James had a financial adviser and they had been having regular reviews but Sarah did not think about seeing him prior to making the decisions.

The issue of superannuation and death benefits is one of the most complex areas of tax. However, it should be used as an opportunity for financial advisers to add value to a client’s financial situation.

A basic strategy for Sarah would have been for her to cash in her husband’s pensions and his superannuation. As long as they were below his pension Reasonable Benefit Limit, there would be no tax payable. Sarah could then recontribute the balances as undeducted contributions back into allocated pensions for herself and hence have an income stream that is substantially tax free.

She could have even improved on this position by retaining a small part of her husband’s allocated pension so as to retain a pre July 83 component. This would help if she ever wanted to cash out the whole allocated pension in the future. It would also help to reduce tax if there was a substantial sum on her death that would have to be paid to her adult children.

There are undoubtedly other issues where an adviser could add value. For example the estate planning issues to do with her will including the amendment to any powers of attorneys and the review of required levels of income.

Summary

The death of a spouse is obviously a very tragic time. However it is also a time where financial advisers may be able to add significant value to their clients financial position.

Clients should seek professional advice at this time. An adviser may be able to use this one-off opportunity to create a very tax effective income stream or to help reduce a large tax liability down the track.

Kevin Smith is associate director, technical services at Rothschild Australia Asset Management.