Estate planning is a critical step in ensuring that your beneficiaries are provided for in the best possible way upon your passing. With a financial planner’s help, you can structure your estate to ensure your beneficiaries minimise their tax and receive the best possible outcome.
At Precision Wealth Planning, we have seen (and heard) the good, the bad and the nasty when it comes to estates and excess taxes. That is why we believe it’s best to be well-informed and wherever possible, plan ahead of time when it comes to structuring your estate.
This case study is an example of what NOT to do when estate planning, but first, let’s take a look at why it’s important to plan ahead in retirement.
Why retirement planning is important
One thing we see often is that retirees want to enjoy their retirement and that involves spending money they have accumulated.
They also want to ensure there is something left for their children and grandchildren once they’ve passed.
The important thing to understand here is if you leave your superannuation to a non-financial dependent (such as adult children, grandchildren, siblings etc) then the taxable component within your superannuation is taxed at 17%.
For the majority of people, the taxable component is the majority of your superannuation.
This means, if you pass away and you have a $500,000 superannuation balance, and it is left to non-financial dependents, they may lose $85,000 of your super balance in tax.
Retirees can always withdraw their superannuation before they pass, and then that cash would be distributed in accordance with their Will, and no tax would be payable.
But, this may not always be practical, or the passing can be unexpected.
Plus, if you do withdraw the money, then it is in your estate rather than being passed directly to your beneficiary which also might not be appropriate for your situation.
How a Financial Planner can help
A financial planner can help retirees minimise the taxable component of their superannuation by utilising what’s called a re-contribution strategy.
This involves withdrawing superannuation monies – while you are able to and they are tax-free – then contributing the money back into superannuation within the caps.
There’s a few factors (such as total amount of money) that influence the best approach for this, as it can get a bit complicated for larger balances.
A case study in what NOT to when financial planning for retirement
A 65-year-old couple retire and the wife worked a lot as an employee and accumulated $550,000, however as the husband was self-employed for a large portion of his working life he had $250,000 in superannuation.
As neither of them had made any additional non-concessional contributions along the way, their entire superannuation is deemed a taxable component.
This means if they had $800,000 in super at the time of their passing, up to $136,000 of it would be lost to tax if the super was left to non-financial dependent adult children.
Here’s how a recontribution strategy could change this scenario for the beneficiaries…
Retirement Planning Advice: The Alternative
In this scenario, the alternative would have been to withdraw their entire superannuation balance giving them $800,000 in the bank.
We would have then recommended re-contributing the money into superannuation so they can use it to commence tax-free pensions.
There is an annual cap of $110,000 per person for non-concessional contributions, but you can choose to bring forward the future 2 years contributions and do up to $330,000 in one go.
But this would only account for $660,000, not the full $800,000 sitting in the bank.
So, to maximise this opportunity and use the full $800,000 – it comes down to timing and strategy.
Estate Planning Strategy
We would have recommended enacting this strategy close to the end of the financial year.
Prior to 30 June, we would contribute $110,000 to each of their super accounts as non-concessional contributions.
Then at the start of July, we could do up to $330,000 per person given the new financial year. We would use that year’s cap, plus the next two years.
But we wouldn’t need the full $330,000, just $290,000 per person to exhaust the full $800,000 originally taken from super.
If they immediately start a pension, then 100% of their super balance is deemed a tax-free component and would remain like that throughout the entire time they have the pension.
This would be a significant boost in the inheritance for those children. Ideally, the couple lives for many years and enjoy their money, but even if they have $200,000 left when they pass, it is still a saving of $34,000 for the children.
Superannuation Contribution Rules
There have been recent changes to superannuation contribution rules, which now allow people to make non-concessional contributions right up to age 75 without meeting the work test.
This opens this strategy up to many more people.
How to use a recontribution super strategy to minimise tax for beneficiaries
Effective estate planning is an important step in ensuring your beneficiaries receive the best possible outcome.
With a financial planner’s help, you can structure your estate in such a way that it minimises taxes and provides a better financial injection for your loved ones.
Not only can this help provide peace of mind to you and your family, but it can also provide a solid financial foundation for their future.
If you want to structure your estate in the best possible way, call Precision Wealth Management or enquire online today!
DISCLAIMER – The information provided in this blog is general and does not consider your individual financial needs or objectives. It does not constitute personal advice. We recommend seeking out professional and independent financial, legal and tax advice which has been designed for your individual situation before acting on any information contained below.
Precision Wealth Management is a local, privately-owned financial planning firm based on Brisbane’s northside.
Our certified advisors work with each individual client to determine the best wealth creation strategy based on their unique situation.
We strive to stay at the forefront of the industry, and our investment approach is based on decades of research.
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Our services include Superannuation Advice And Planning, personal Insurance Advice, Budgeting And Cashflow Management, Investment Strategy And Advice, Aged Care Financial Advice, Retirement Planning Advice, and Debt Reduction Financial Planning.
At Precision Wealth Management, we offer flat fee pricing which is determined on the complexity of the work – not the value of your investments.