The tax man does not have children

You thought we no longer had death duties but call it something else and we can see that the taxman can get a slice of your superannuation on your death if it goes to certain people.

Everyone who has children knows that the Bank of Mum and Dad is an institution that runs 24/7 every day of every year and that even when our kids say they are independent they always know where to go in difficult times.

Unfortunately, the tax man thinks differently and believes once your kids reach 18 they are no longer financially dependent on you and so, tax part of your wealth if you send it to them on your death.

There is only a select group of people who can receive your residual superannuation interest on your death and you need to be careful when deciding on the split of your wealth on death to maximise the distribution.

For superannuation, the law is very strict on who can receive any balance, and these include:

1. financial dependents
2. your spouse
3. your children under 18
4. anyone that you are in an interdependent relationship with.

The taxman then takes his slice of the money if it goes to persons outside of this group.

There are circumstances where your child under 25 can receive a benefit from your superannuation and not be taxed but these are limited.

[sam id=37 codes='true'] It is critical to recognise that your superannuation is not your money and so cannot form part of your estate (your interest in trusts are not yours as well) and so must be treated specifically.

The normal procedure is to have what is called a binding death nomination to either direct the superfund trustee to distribute directly from your super to the above categories of people or to have the funds directed to your estate which then will direct it to the relevant persons.

Note that in both scenarios the tax rules will apply.

The documentation of a binding death nomination has very specific legal requirements and if incorrectly drafted (as can often occur) is void and so the trustee of the superfund can decide themselves how to distribute the funds.

It is also the case that the documentation requirements are significantly different depending on whether you have a self-managed superfund or are in a retail/industry/ employer fund.

It is interesting to note that the taxman treats the relationship to dependency differently if it is the grandparent’s superfund or the actual parent’s super monies. 

The different administrative bodies that govern and manage superannuation law also look at the dependency issue differently.

It is therefore critical to get advice from an SMSF or Superannuation specialist when preparing your will as no one wants to necessarily be caught in reducing the kid's inheritance by death duties applicable to superannuation.

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About Ken Raiss Ken is director of Metropole Wealth Advisory and gives strategic expert advice to property investors, professionals and business owners. He is in a unique position to blend his skills of accounting, wealth advisory, property investing, financial planning and small business. View his articles