A blended family, a lapsed nomination and a jointly owned home
Judith, 72, married Brian, 68, eighteen months ago. They are the only members of an SMSF holding $1.35 million: Judith's interest is $880,000 (taxable component $820,000, tax-free component $60,000) and Brian's is $470,000. Judith signed a non-lapsing binding death benefit nomination in 2019 leaving her benefits to 'my estate'. Her will, also made in 2019, leaves everything to Brian. The family home, worth $1.1 million, is registered in joint names. Judith has two adult, financially independent children from her first marriage and wants them to receive 'her share' eventually; Brian has two children of his own. Judith has $360,000 in cash outside superannuation and is considering a large contribution before 30 June. The SMSF deed permits binding nominations and reversionary pensions, and Brian would be the surviving trustee.
1. Compare the tax and control consequences of the three available routes for Judith's $880,000 superannuation benefit on her death.
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Route A - current nomination to the estate. The trustee pays the estate and the legal personal representative pays the children, who are not dependants. Tax on the taxable component is 15% plus 2% Medicare: $820,000 x 17% = $139,400; the $60,000 tax-free component passes tax-free. The benefit is exposed to estate administration, creditors and any family provision claim.
Route B - binding nomination directly to the children. Identical tax, $139,400, but paid outside the will and outside the estate, so it is faster and bypasses an estate challenge (though not a claim against the fund). It is final and inflexible, and gives the children no asset protection.
Route C - reversionary pension or nomination to Brian. Tax-free, because a spouse is a dependant. It keeps the money invested and gives Brian income, but the money becomes his. He may leave it to his own children, or die without a nomination and leave it to the trustee's discretion - defeating Judith's stated intention entirely.
The real comparison is not 17% versus nil. It is control versus tax: Route C costs nothing but loses the objective; Routes A and B deliver the objective at 17% of the taxable component. A fourth option - nomination to a testamentary trust - carries the same 17% but adds asset protection and income splitting, with minors taxed at adult rates.
2. Judith has $360,000 of cash outside superannuation. Explain how a non-concessional contribution changes the death benefit outcome, and the conditions that must be satisfied.
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The mechanism. The tax-free component is fixed at the time of contribution and is never taxed on a death benefit, whoever receives it. A $360,000 non-concessional contribution using the three-year bring-forward would make $360,000 of Judith's interest tax-free. If the benefit ultimately goes to her adult children, the saving is $360,000 x 17% = $61,200 - a certain, quantifiable benefit from a transfer that costs nothing else if the cash is genuinely surplus.
Conditions. Her $880,000 balance is well below the $1.76 million bring-forward threshold, so the full $360,000 is available, and her balance remains far below the $2.0 million transfer balance cap. Cash is an eligible contribution, and there is no work test at her age. She must make the contribution before 30 June and confirm the fund's deed permits it.
The critical caveat. The strategy only pays if the death benefit is destined for non-dependants. If the money goes to Brian, the tax-free component adds nothing, because a spouse payment is already tax-free. So the contribution decision cannot be made before the destination decision: will, nomination and contribution must be designed together. If Judith is unsure which route she wants, take the contribution anyway - it builds flexibility - but tell her plainly that it saves nothing unless the children are the ultimate recipients.
3. Recommend the documentation steps required to give effect to Judith's intentions, including the house, the nomination and trustee control.
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1. Fix the nomination first. The 2019 non-lapsing nomination to 'my estate' will direct the benefit through the will, which leaves everything to Brian - the opposite of what she wants. It should be replaced. If the deed permits, use a non-lapsing nomination to the children or to a testamentary trust; if it does not, a reversionary pension to Brian with a binding nomination from Brian back to her children is the fallback, but that depends on Brian's cooperation.
2. Fix the house. Joint tenancy means the home passes automatically to Brian, and the will has no effect on it. Severing the joint tenancy and holding as tenants in common lets Judith leave her half to her children, or give Brian a life interest with the remainder to them. This is often the largest single item and is routinely overlooked.
3. Deal with trustee control. Brian as sole surviving trustee would control any benefit paid to the estate and much of the discretion. Appoint an independent co-trustee or a corporate trustee now, and confirm the deed's payment standards and reversionary pension provisions.
4. Update the will. Appoint an independent executor if Brian is not to control the process, and consider a testamentary trust for the children.
5. Make the $360,000 contribution before 30 June to build the tax-free component, once the destination is settled.
6. Confirm the fund's borrowing and asset position is unaffected, and diary a review at every life event - remarriage is exactly the trigger that should have prompted this three years ago.