Super and estate planning
Child beneficiary's transfer balance cap
Where a child receives a death benefit income stream, a modified transfer balance cap applies so that the child, to some extent, inherits the deceased's transfer balance cap.
The modified transfer balance cap is generally set by reference to the child's portion of the deceased parent's retirement phase income stream(s).
In the event that a death benefit income stream exceeds the child's transfer balance cap, any excess amount must be cashed out to the child as a lump sum death benefit payment. The child is not able to retain this amount in the superannuation system.
Once the child cashes out the death benefit income stream at age 25 or when the capital of the income stream is exhausted, the child's transfer balance account ceases. This ensures the child's ability to commence income streams in retirement is not impacted by the death benefit income streams received as a child.
Transfer balance cap increment
The amount of transfer balance cap applicable to a child death benefit income stream is referred to as a 'transfer balance cap increment'. A transfer balance cap increment applies for each death benefit income stream the child receives from a parent. In the case of reversionary superannuation income streams, the transfer balance cap increment is deferred for twelve months.
The amount of transfer balance cap increment applicable depends on a range of factors such as:
- whether the child pension was commenced before 1 July 2017;
- whether or not the deceased had a transfer balance account; and
- whether the child is the sole beneficiary of the death benefit.
Child pension commenced prior to 1 July 2017
If the child pension commenced prior to 1 July 2017, the child's transfer balance cap increment is $1.6 million.
If the balance of the child pension is in excess of $1.6 million, any excess amount will have to be cashed out of superannuation. Tax is not payable on the commutation.
Child pension commenced after 1 July 2017: deceased does not have a transfer balance account
If the deceased parent did not have a transfer balance account at the time of their death as they had not commenced a retirement phase income stream, the child's transfer balance cap increment is:
- if the child is the sole beneficiary - the general transfer balance cap; or
- if the child is not the sole beneficiary - the child's proportionate share of the deceased's superannuation interests multiplied by the general transfer balance cap.
Child pension commenced after 1 July 2017: Deceased had a transfer balance account
Where the deceased parent had a transfer balance account just before their death, the child beneficiary's transfer balance cap increment is determined by their portion of the deceased parent's retirement phase income streams that the child receives as an income stream. In other words, each death benefit income stream the child receives must be sourced solely from the retirement phase interest of the deceased parent.
Where the child's death benefit income stream is partly sourced from accumulation phase and partly sourced from retirement phase, the amount of the child's transfer balance cap increment will equal the portion sourced from retirement phase.
If any part of the child pension is sourced from accumulation interests, the child will have an excess transfer balance.
Earnings accrued after death
Earnings that accrue on the deceased's retirement phase interest between date of death and commencement of a death benefit income stream are considered part of the deceased's retirement phase interest.
Therefore, the child's transfer balance cap increment includes accrued earnings.
Life insurance proceeds
Where life insurance is held within superannuation and the premiums are funded from accumulation phase, the proceeds from the insurance policy are not considered to form part of the deceased's retirement phase interests.
In this case, the life insurance proceeds form part of the deceased's accumulation interest.
Where both parents die
Where both parents die, the child's transfer balance cap increment is the sum of amounts worked out in relation to each parent.
Last modified: Monday, November 19, 2018