Terminal illness and superannuation - Estate planning and testamentary trusts - Debts and Centrelink assessment

Terminal illness and superannuation

One of the most difficult periods in a person’s life is when they are diagnosed with a terminal illness. As personal issues become the main focus, it’s easy to lose sight of one’s financial situation. However, with prudent planning, the financial burden can be eased and assets can be maximised for surviving beneficiaries.

One of the key assets to consider upon terminal illness is superannuation. A member of a super fund with a terminal medical condition can generally access their superannuation benefits as a tax free lump sum. The lump sum may be required for immediate medical or personal reasons. Although it may be tempting to cash the entire super balance as a lump sum, it may be advantageous to leave a portion in the fund particularly where a spouse or children are beneficiaries.

Following death, a number of strategies can be used with the super fund. Certain beneficiaries of a lump sum are eligible for a boost to the super benefit, known as the anti-detriment payment. This payment represents a refund of the tax paid in the account. Furthermore, tax effective income streams can be paid to certain beneficiaries to meet ongoing needs.

It’s important to seek financial advice if you suffer a terminal illness as the best financial planning strategy depends on your personal situation and objectives.

 

Estate planning and testamentary trusts

A testamentary trust can be an effective estate planning tool, providing asset protection, flexibility and the tax effective distribution of wealth. A testamentary trust can be set up by an appropriate clause in the Will and is set up following death using estate assets. You can also use superannuation and insurance proceeds to fund the trust.

Testamentary trusts are normally discretionary trusts, offering flexibility. The trustee can vary the income distributions each year depending on the beneficiaries’ circumstances. This can generate tax savings, particularly if there are a significant number of children or grandchildren in the family. Minors who are beneficiaries of a testamentary trust pay tax on trust income at normal marginal tax rates. Given the low income tax offset, individual taxpayers can receive income up to $16,000 in the 2011/12 financial year without paying tax (excluding other tax offsets).

A testamentary trust could be used to provide greater control over the distribution of the estate assets. For example, a beneficiary may only become entitled to capital from the trust upon attaining a certain age.

There are some considerations with testamentary trusts. Firstly, the estate may be delayed until grant of probate is completed. This further delays the establishment of the trust. Secondly, the estate may be contested, so the trust may have reduced assets available for beneficiaries.

Testamentary trusts could be used to provide for your beneficiaries. Furthermore consider how your parents could use a testamentary trust to effectively transfer wealth to you and your beneficiaries. Financial and legal advice is important when considering your estate plan, including the need for a testamentary trust.

 

Debts and Centrelink assessment

If you receive (or are about to receive) a Centrelink payment you should understand the rules for assessment of debts. Generally, the value of an asset under the assets test is reduced by any outstanding charge or debt over that asset. For example, a margin loan of $70,000 on a $100,000 investment reduces the assets test value to $30,000.

A charge or debt cannot reduce an asset’s value where it is secured against an exempt asset, for example, the family home. So let’s say $300,000 is borrowed using the principal residence as security to purchase an investment property. The entire amount of the investment property is assessed under the assets test, with no reduction for the amount of debt. Where the lender permits, you may be able to use the investment property as security, rather than the principal residence. In this case, the $300,000 debt reduces the market value of the investment property and consequently Centrelink payments may increase.

Unsecured loans can only reduce an asset’s value if you can provide evidence that the loan was obtained specifically for the purchase of that asset. Unsecured loans obtained for general purposes or for purposes other than the purchase of the asset (eg. for an overseas holiday) do not reduce the value of a person’s assets.

 

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any information without obtaining professional financial advice specific to your circumstances.