Superannuation testamentary trusts (STTs) are powerful tools for estate planning. They offer a strategic approach to minimise tax liabilities and ensure efficient wealth distribution.
What is superannuation testamentary trust?
A superannuation testamentary trust is a trust set up in a will to manage the superannuation benefits of a deceased person. This type of trust comes into effect upon the individual’s death and is designed to provide greater control over the distribution of assets and potentially significant tax savings.
Tax on superannuation death benefits
When a person dies, their superannuation (super) death benefits can be paid directly to beneficiaries or to their estate. If paid directly, the tax treatment depends on whether the beneficiary is a “tax dependant” or a “non-tax dependant.”
- Tax Dependants: This includes spouses, children under 18, and individuals financially dependent on the deceased. They can receive the death benefit tax-free.
- Non-Tax Dependants: For adult children and other non-dependants, the taxable component is taxed at marginal rates with a tax offset.
By directing superannuation death benefits to a superannuation testamentary trust, the funds can be managed in a way that potentially reduces the tax burden.
Learn more about superannuation & death benefit payments.
CGT savings
Assets held within a superannuation fund may be subject to capital gains tax upon the death of the member if not properly managed. By transferring these assets into a testamentary trust, beneficiaries can potentially defer or reduce the capital gains tax (CGT) liability. The trust can distribute capital gains to beneficiaries in a tax-efficient manner, leveraging their individual CGT discount entitlements.
Income splitting
A testamentary trust allows for income splitting among multiple beneficiaries. This means the trust’s income can be distributed in a way that takes advantage of the lower marginal tax rates of various beneficiaries, thereby reducing the overall tax burden. For example, income can be distributed to beneficiaries who are in lower tax brackets or have no other sources of taxable income.
Asset protection
Superannuation testamentary trusts provide a layer of protection against creditors, bankruptcy, and family law claims. This asset protection can indirectly contribute to tax savings by preserving the wealth within the family, avoiding forced asset sales which might incur capital gains tax and other penalties.
Flexibility in distributions
Trustees of testamentary trusts have the discretion to distribute income and capital to beneficiaries in the most tax-efficient manner. This flexibility allows for strategic planning to minimize tax liabilities, taking into account the beneficiaries’ personal tax situations.
Suppose a deceased person leaves a significant amount of superannuation benefits to their adult children. If paid directly, these benefits could be subject to high tax rates for non-dependents. By directing these benefits into a testamentary trust, the income generated can be distributed among several beneficiaries, including minors, taking advantage of lower tax rates and potentially saving a significant amount in taxes.
Estate planning considerations
Using a superannuation testamentary trust requires careful planning:
- Legal Advice: It’s essential to seek legal advice to ensure the trust is set up correctly in the will.
- Trustee Selection: Choosing a competent trustee who can manage the trust in the best interest of the beneficiaries is crucial.
- Regular Review: Regularly reviewing the estate plan to reflect changes in tax laws and personal circumstances is important to maintain tax efficiency.
FAQs
Can superannuation testamentary trusts be established for any type of superannuation benefits?
Yes, these trusts can be established for various superannuation benefits, including self-managed super funds (SMSFs) and retail super funds.
Are there any tax implications for the beneficiaries of the trust?
The tax implications for beneficiaries vary based on the structure of the trust and the distribution of superannuation benefits. It’s essential to seek professional advice to understand these implications thoroughly.
For more detailed information and personalised guidance on setting up superannuation testamentary trusts, consult with our experts today.
About our advisers:
Michael Fox has been dedicated to the success of his clients, devising comprehensive wealth strategies for both personal and business growth for over 4 decades. With extensive expertise in business governance and family business succession, Michael specialises in empowering emerging businesses and family enterprises by fostering renewal, enhancing value and smooth transitions to the next generation. Please do not hesitate to reach out if you need assistance.
Chrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. She empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Her commitment to building trust and lasting relationships goes beyond professional excellence; it’s a personal ethos. By actively listening and understanding her clients’ businesses and goals, Chrisanthe thrives on collaborative efforts to navigate challenges and collectively achieve their aspirations. Please do not hesitate to reach out if you need assistance.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or get professional advice from a qualified adviser at KMT Partners.
