Maximising your Estate for your Beneficiaries

Tuesday, June 11, 2024

A Superannuation re-contribution strategy is a simple process that when used effectively can save your Estate beneficiaries many thousands of dollars.

In the event of your passing, the transfer of your superannuation investment to your beneficiaries can trigger some of the largest tax payments out of your superannuation, leaving your beneficiaries with less than you had hoped. The key is planning ahead and managing the components within your superannuation so you minimize the tax payable by your beneficiaries upon your passing.

Superannuation Benefits are made up of two components - a tax-free Component and a Taxable Component. These will be expressed as a percentage value of your money within the superannuation fund.  For example, you may have $600,000 in superannuation and 80% of it may be taxable and 20% may be tax-free. Each investor’s percentages are different as this is related to how that money was placed into superannuation. These percentages change over time however they are locked in once you establish a pension and start drawing money from the account. So in this example, if you were to pass away, 80% of your benefit may be taxable to your beneficiaries.

If you have Taxable Component and you wish to leave your Super Benefit to your Spouse, a child under 18, or anyone financially dependent on you, there are no tax issues as those beneficiaries will receive the benefit tax free. 

However, if you have a Taxable Component and wish to leave your Super to someone else, such as a child over 18 who is not financially dependent on you, those beneficiaries will be taxed at up to 15% (plus Medicare Levy) of the Taxable Component of the Death Benefit. Following this same example, tax paid by these children (over 18) could be over $79,000.

The best way to reduce the potential liability for tax is to apply what is called a re-contribution strategy.

A re-contribution strategy is a simple process that can save an investor’s beneficiaries many thousands of dollars. The strategy involves withdrawing benefits from a member’s superannuation account and then making a non-tax deductible contribution of the same money back into the fund. This has the effect of changing the tax-free component of your superannuation fund.

Generally speaking, a re-contribution strategy happens when you have stopped working and are allowed to access your superannuation. You will also need to qualify to place the money back into superannuation and make large contributions into super. In current laws you would need to be under 75 years of age.

The tax savings of this strategy for your beneficiaries can be significant. Following the same example of having $600,000 in superannuation. If these funds were joint holdings of a couple, who are under 75 and retired, a re-contribution strategy would allow them to take all $600,000 out of superannuation and pay no tax. In this example there may be the option to split the account into two funds of $300,000 each. This is possible, as a retiree under the age of 75 can make a tax free contribution of up to $330,000 in a single lump sum, depending prior years contributions.

This transaction has now had the effect of changing the components from being 80% taxable to being 100% tax free. They can start an allocated pension and lock in the components. In this example, when they do pass away and the money is transferred, the beneficiaries would pay no tax, as opposed to over $79,000 if nothing was done. 

We recommend you consult your Financial Adviser to discuss your superannuation investment strategy. Maher Digby, Sunshine Coast are specialists in superannuation retirement planning, so you can contact us today to find out more about your superannuation contribution options and best retirement strategies for your personal circumstances.

For more Information contact Mark Digby at Maher Digby Securities Pty  Ltd - Financial Advisers – AFSL No. 230559. This document was prepared without taking into account any person’s particular objectives, financial situation or needs. It is not guaranteed as accurate or complete and should not be relied upon as such.  Maher Digby Securities does not accept any responsibility for the opinions, comments, forward looking statements, and analysis contained in this document, all of which are intended to be of a general nature. Investors should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend consulting a financial advisor.