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The old age pension is yesterday’s news. It’s time to think again about the power of your legacy.
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What will happen to your super when you die?
14 May 2014
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Over the next 30 years, according to the Actuaries Institute of Australia, the number of Australians over the age of 65 is expected to double, and the number over 85 is expected to triple. Federal Treasurer, Joe Hockey, has just announced a plan to increase the entitlement age to 70. For those of us approaching our mid-50s, it is clear that the days of the old age pension are numbered. What will happen next?
Our new reality is that we will leave substantial amounts in superannuation in our estates. This may be a good thing, but the challenge is what is going to happen with it. For many, a testamentary discretionary trust (TDT) may be a solution that provides flexibility and asset protection to future generations.
Changing demographics
Boomers are the largest and longest-lived generation in history in many developed countries, steeped in a culture of looking after ourselves and expecting those who come after to do the same, thank you very much! Larger families are the exception anyway so, quite frankly, there are not enough younger workers to contribute to the old age pension system, as currently designed. Besides that, we taught them independence, and they will not be too keen to work to take care of us twenty years from now. Do the maths, and make a new plan.
The Australian retirement system is designed on three pillars. One is the means-tested old age pension. The second is compulsory employer contributions to superannuation and the third is made up of the voluntary contributions to superannuation and other investments. If the first pillar doesn’t disappear simply because of demographic challenges, its importance will certainly diminish. The remaining two pillars stand strong however, and that is where an estate plan must focus.
What will happen to your superannuation when you die?
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What happens to your estate is whatever you planned for. Traditional estate planning for middle Australia has generally been limited to simple wills, powers of attorney and a guardianship appointment. For most people the simple will entails giving a few bequests to specific individuals and the balance of the estate equally to the current spouse and then children. That may have been fine for a previous generation fortunate just to leave a house. But many people now are leaving substantial wealth in superannuation. Can that asset be protected to continue to grow and benefit retirement needs of future generations?
Or will adult children inherit a nice tax free benefit so they can afford the overseas holiday in top hotels. Will some of it go directly to 20-something grandchildren who just see a sports car or jewellery? How can it be protected to make a difference in the lives of future generations?
The benefit of utilising a TDT is that control of the assets in the trust only goes to the beneficiaries as determined by the trustees in accordance with the terms of the trust. If nothing else, that may add an extra layer of judgment between the trust funds and the holiday. Beyond shielding assets from profligate spending, a TDT can also preserve assets from taxes, bankruptcy and the complications of family law. Because assets may be protected, in some circumstances, for as long as eighty years after the death of the testator, it may be a way to build intergenerational wealth.
Taxation
Keep in mind that each beneficiary of the trust is taxed as a separate taxpayer. Let us suppose that you named your son as the trustee of a TDT that will benefit him and both of his children on your death. Your son has a healthy income and a healthy tax rate to go with it. If he permits a distribution from the trust to pay for schooling costs of one of his children, that child, rather than your son, will be the tax payer with respect to that distribution. Since the child will probably fall below the tax free threshold, the distribution will be effectively tax free.
Bankruptcy and family law
Because the assets are held by a trust rather than an individual, they are less likely to be pulled into a bankrupt estate to be used to satisfy the claims of creditors. By the same token, trust assets are less likely to be viewed as marital property, subject to division with a former spouse in the event of a divorce.
A way to build generational wealth
A mindset change needs to occur in Australia around superannuation. The capital of superannuation accounts should not be distributed to a deceased's children but be seen as an asset to be passed through generations. Following generations can and should add to the value of the capital of the superannuation account. A family can protect its wealth for multiple generations by protecting the capital and only dispersing the income from the capital to subsequent generations.
Good estate planning does not have to be complex or overly expensive. It's about getting a balance and achieving a better outcome for a reasonable cost. For further information about comprehensive estate planning, visit us at www.owenhodge.com.au/familyfuture/.
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