Donā€™t Let Estate Planning Strategy Jeopardise Beneficiariesā€™ Access to Child Care Subsidy
It’s often overlooked by clients and estate planning lawyers alike, but it’s important when acting for clients with adult children to ensure that we don’t inadvertently put the adult child beneficiary’s childcare subsidy at risk when devising the superannuation death benefit strategy.
How can Super Affect the Child Care Subsidy (CCS)?
The CCS is very important for many families with young children. However, a client’s decision about how to direct their superannuation death benefits via their Binding Death Benefit Nomination (BDBN) to benefit their adult child can have disastrous consequences and remove the adult child's eligibility for the CCS.
When the super death benefit is paid directly to the adult child from their parent’s superannuation fund, the adult child must report the lump sum death benefit in their family income estimate for that financial year. Receiving a large amount, for instance, $200,000, will significantly inflate the adult child’s income, causing them to exceed the relevant eligibility threshold for the CCS for that financial year.
If the client instead directs the superannuation death benefit, via a BDBN, to their legal personal representative (i.e. the technical phrase for paying it to their estate for distribution under their will), the gift is not included in the reportable family income and does not impact on the CCS threshold.
Such a small change can have drastic consequences for an adult child relying on the CCS!
Directing the superannuation death benefit directly to an adult non-financial dependent beneficiary can not only jeopardise their CCS, but it is also factored into the income calculation for Division 293 tax and incurs the additional 2% Medicare Levy.
Pros and Cons of Paying Super to the Beneficiary Versus the Legal Personal Representative
While paying the superannuation death benefit to the legal personal representative for distributing under a client’s will can protect an adult child’s CCS entitlements and avoid the impost of the 2% medicare levy, there are some disadvantages:
BDBN to the beneficiary directly
| PROS | CONS |
|---|---|
| • It’s simple | • Often doesn’t allow for contingency planning if beneficiary doesn’t survive the member |
| • Can set up a pension where the beneficiary is a spouse or minor child, creating more opportunities to leave the money in the super fund short term | • No asset protection or tax flexibility on income |
| • The beneficiary often receives the money faster | • Super can impact beneficiary's income for Centrelink and Div 293 tax calculations |
| • The super benefits are excluded from the challengeable pool if there’s a FPA (unless notional estate applies) | • 2% Medicare levy is payable on benefits ultimately received by non-tax dependants |
BDBN to the Legal Personal Representative
| PROS | CONS |
|---|---|
| • Can plan multiple contingencies if first nominated people die | • Super is part of challengeable pool if there is a FPA |
| • Super can be paid into a TT to achieve asset protection and tax free income to minors (but need a SPT to ensure lump sum is tax free) | • It can take longer for beneficiaries to receive the money as have to wait for estate administration to be finalised |
| • Super doesn't impact beneficiary's income for Centrelink and Div 293 tax calculations | • Your will becomes important |
| • 2% Medicare levy is not payable on benefits ultimately received by non-tax dependants | • Can be more complex if will contains a testamentary trust |
Because the death benefit has to pass through the estate, the process of administration and finalisation can take significantly longer, meaning the beneficiary must typically expect greater delay than if the funds were paid directly to them from the super fund.
In jurisdictions other than New South Wales, paying the superannuation to the legal personal representative can bring the superannuation death benefit into the pool of assets available to satisfy any challenge against the will, whereas it would not be exposed to such a risk when it is paid directly to the beneficiary from the superannuation fund.
There are other issues around the sophistication of the binding nomination and contingency planning, particularly if the super is held within a public offer or industry fund.
So as estate planning lawyers, it’s important to evaluate the competing advantages and disadvantages when it comes to advising a client whether to make a binding nomination directly to the beneficiaries or to the legal personal representative.
As always when it comes to superannuation, collaborating with a client’s financial adviser about the financial considerations remains vital to achieving a holistic and comprehensive outcome for the client’s estate planning.
BDBN Templates For Lawyers
Here at The Art of Estate Planning, we have Binding Death Benefit Nomination Precedents for SMSFs. As part of this BDBN precedent package for lawyers, we have a number of white labelled template flyers which assist to explain the competing considerations on crafting the appropriate death benefit strategy.
This precedent package is loaded with tools to support lawyers to communicate the complex superannuation rules clearly and straightforwardly to clients so that they're empowered to make the choices that best achieve their goals.
The next time you are assisting a client prepare their super death benefit nomination, I hope this post plants the seed to remind you to ask your clients’ whether maintaining any adult children’s CCS is an important consideration.
Want More?
In Episode #3 of the The Art of Estate Planning Podcast, we expand further on super strategies and the CCS.
Listen to Episode #3
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