You can’t take it with you, but you can leave it behind

Keeping Retirement Simple – Part 8

After the recent (disastrous for Biden) Trump-Biden debate, Poland’s top diplomat tweeted “It is important to manage our ride into the sunset.” And another commentator said, “We can’t beat Father Time; he’s never been defeated.”  

Good reminders that we must plan for the inevitable, don’t you think? Given the financial implications for our loved ones, it is important for us all to plan out our estate. Principle #8 in our series is We all die at some point. Make sure your estate is ready.

There are four particular topics to focus on:

First, the importance of having an up to date will.

Second, ensuring your beneficiaries for your super fund are set up right

Third, the so-called “death tax” on super.

Fourth, leaving a legacy.  

An up-to-date will

Having an up-to-date will helps ensure your assets are distributed according to your wishes on death. Without a will your assets are distributed according to the laws of “intestacy” (dying without a will), which may not be consistent with your wishes. A will provides clarity about your intentions and specifies an executor to oversee and administer your estate.  And it can reduce the risk of disputes between family members after you are gone.

Even if you have a will, you should check that it’s still current, reflecting any changed circumstances or changed preferences about how you would like your assets distributed.  

If you don’t have a current will, you should seek legal advice or you may want to consider a service such as Willed. Retirement Essentials customers can receive a 20% discount on the price of an online will with Willed.

Setting up your super beneficiary(ies)

Many people don’t realise that super doesn’t automatically become part of your estate on death. It’s important you specify your beneficiaries correctly so the Trustee of the super fund handles withdrawals on your death as you would wish. It can also be vital to avoiding taxes on death as different beneficiaries are treated differently from a tax point of view.  (See the next section)

Often super members will want to establish “binding death nominations.” This form of beneficiary specification is legally binding on the Trustee of the super fund, meaning they must follow your instructions.  Otherwise, the Trustee may be open to claims made by family members or others who assert they should be entitled to be a beneficiary of your super fund. Challenges to beneficiary nominations are not uncommon…and can lead to unintended consequences and family drama.  

If you are unsure about how to set up your beneficiaries, you might contact your super fund.  Our advisers can also help you with how to best set up your beneficiaries during an Understanding super consultation.  

“Death Tax” on Super

It’s usually said that Australia doesn’t have inheritance tax. One exception is superannuation that is left to non-dependants, like adult children. In such cases a “superannuation death benefits tax” can apply.  

If you die and leave your money to your dependant spouse or de facto, there is no tax. But when leaving super to non-dependant children it’s a different story. Tax is incurred at the rate of 17% (including the Medicare levy) on so-called “taxed elements”(which include concessional contributions on which tax have been paid). Non-concessional contributions – which you’ve paid from after tax monies– are considered tax-free and not subject to death benefits tax. However, if you were to have untaxed benefits (eg benefits from untaxed super funds such as certain public sector super funds) these could be subject to a tax of up to 32%.

For couples, it’s most likely that super can be passed on to a surviving partner without death tax. But for singles and surviving spouses, the death tax issue is a real consideration. There are a number of strategies for avoiding it, such as taking it out of superannuation before you die. Another popular strategy is “recontributions” where you withdraw money from super and return it as non concessional contributions under the generous bring forward contributions rules, thereby increasing the tax-free portion of your super. As the contributions and withdrawal rules on super are complex and a mistake could cost you, you should not undertake a “recontributions” strategy without advice.  

Leaving a legacy

We’re all different in retirement. Some want to spend every last cent they have to enjoy life in retirement (often called the “Die With Zero” goal). Others have a strong desire to leave something to the kids, grandchildren or a favourite charity. Sometimes that’s a specific amount and sometimes it’s a whatever is left over approach.  

While we don’t know when we’ll die, you can make a good effort to plan your legacy, if any, using retirement income forecasting tools. Our forecasts predict not only how much you can afford to spend in retirement but how much wealth remains upon your passing. Our financial advisers can help you incorporate a legacy goal into your retirement plan.  

Further information

I’ve just touched the surface of these topics. Enough to show, I hope, the principle of being prepared for “sunset” is important. For more information, we’d recommend Noel Whittaker’s latest book: Wills, death & taxes made simple.

What about you?

Many people don’t have a valid will. They have either never done one or their circumstances have changed so much that it is unlikely to be valid. Is this your circumstance? You could help us to understand more about why people do and don’t have a valid will by answering some quick questions in our latest Retirement Pulse. It will only take you a couple of minutes.