Case Study - Estate planning with tax benefits in an SMSF

Case Study - Estate planning with tax benefits in an SMSF

These clients have agreed to share their story. Everyone’s situation is different, so their choices and outcomes will be different to yours. Consider your circumstances before deciding what’s right for you. The names and identifying details in the below case study and accompanying testimonial have been changed to protect the privacy of individuals.

Longstanding Blueprint clients, Nathan and Susan Hopkins (Age 60) had an established SMSF. Within that fund, both Nathan and Susan had established both pension and accumulation accounts and were receiving a pension stream with partially taxable, partially tax-free components.

Blueprint assisted the Hopkins to develop a new pension strategy which would save on tax and afford estate planning benefits. The Hopkins had in mind that they wanted to continue to grow their SMSF balance and so were prepared to make a new non-concessional contribution of $450,000 each, the maximum non-concessional contribution under the three-year bring-forward rule. To ensure that this part of the fund was kept separate from the existing fund, we advised the Hopkins to undertake a pension refresh with the existing pension and accumulation account and start a new pension with those proceeds. That ensured there were no longer any assets in the accumulation fund.

With the new non-concessional contribution, Nathan and Susan started a second pension with those funds, which were then 100% tax free, having been created from an accumulation fund of 100% non-concessional contributions. They now had two pension streams each within which investment earnings were completely tax free.

That allowed the Hopkins to draw the minimum pension from the account that is 100% tax free and top up the remaining pension requirement from the account with the mixed tax status. This allowed the balance in the tax free account to be largely preserved whilst the mixed-tax account was utilised for the majority of their living expenses. This was the key to the estate planning consideration. When the couple pass away, the income stream from the tax free account can be paid to their adult children (who are considered non-dependents from a taxation point of view) as a tax free lump sum amount. They would otherwise need to pay 16.5% tax on the taxable portion of such a payment. By keeping the two pension streams separate, Blueprint helped the Hopkins save their children from a combined tax bill of up to $144,000 when the proceeds of the super account are paid out on the Hopkins’ death.

The keys to this successful strategy were:

  • The ability to conduct a pension refresh strategy which moved all of the Hopkins’ existing super assets into one pension stream, making way for a new accumulation fund to be established.
  • Using non-concessional contributions to fund the new accumulation account that was immediately converted to a tax-free pension account.
  • The ability to successfully direct the proceeds of this pension to their adult children upon death and thereby save the children from a potentially adverse tax bill that they might otherwise face with the partially taxed income stream alternative.

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