We all know how important it is to have an up-to-date will, an enduring power of attorney and an advance health directive.
Unfortunately, it's all too easy to fall victim to inertia, and never get around to the estate planning that needs to be done.
It's so sad, because the consequences can range from annoying to horrendous.
Recently, a friend rang to tell me about the death of his 75-year-old sister.
She had never married and had been living with him and his family for several years.
Last November she was struck with an unexpected and serious health event, and after three weeks of palliative care she passed away.
He said, "At least it gave us time to get her will in order and get an enduring power of attorney executed, but we had no idea we would be up for tax on her superannuation."
I sympathised with him but said, "I've written about the death tax many times, didn't you read it?"
He responded, "To be honest, in the emotion of the time it never occurred to us."
Her superannuation was about $600,000, included no life insurance, and was mainly taxable component.
It was all left to her family, but because they were not financial dependents it was subject to tax.
The tax owing turned out to be $102,000, or about 17 per cent.
Let's reiterate how the death tax works.
Superannuation may consist of a taxable component and a tax-free component, but because the tax-free component only arises from non-concessional contributions many people have no tax-free component at all - and most people's superannuation is mainly taxable component.
There is no tax on super if it is left to a dependent - a spouse or de facto partner is always classed as a dependent - but if left to a non-dependent, the tax on the taxable component is 15 per cent plus any Medicare levy.
Given that most people die in their senior years, it follows that the people most likely to receive the proceeds of their superannuation are adults who are not dependent on them.
That's the bad news.
The good news is the death tax is easily minimised with a bit of planning.
If the fund member is over 60 and their death is imminent, all that is required is for the person or their attorney to withdraw the money from their superannuation fund, which can be done tax-free, and place the money in the member's bank account.
This has two benefits: it avoids the death tax, and also minimises challenges to the estate that could occur if the money was still in superannuation when the member died.
Furthermore, if it was foreseeable the estate could be challenged, the money withdrawn from superannuation could be invested in a range of insurance bonds in the names of the people the member wished to have as beneficiaries.
This would take the money out of the reach of any challenge.
The superannuation withdrawal requires a notice to the trustee of the fund, so if the member may be in the final stages of their life the withdrawal notice should not be delayed.
Apparently, serving the notice on the trustee is sufficient to avoid the tax, even if the fund has not yet paid out the money.
If it could be reasonably expected that a person did not have many years to live, it may be simpler for them to withdraw most of their money from superannuation sooner rather than later.
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It would give them the benefit of making gifts with it, if that's what they wanted, and of enjoying seeing the benefits of the gift to the recipient - it would also prevent a last-minute panic if they took suddenly ill.
You can't take it with you, but surely it makes sense to maximise the money available for your estate.
Your money questions
I am in my late 40s and have $10,000 that I need to invest for six months. I have already used up the amount I am allowed on my fixed-rate home loan, but the fixed-rate portion expires in April next year. I have a fixed investment loan (fixed till 2023), but I am hesitant to put the $10,000 into this account.
You certainly don't want to reduce an investment loan on which the interest would be tax-deductible, and there is no point incurring penalties by making early repayments on fixed loans. Your best option is to park the money in your bank account and then pay off your non-deductible housing loan when the fixed rate expires.
I am 60 and my husband is 72. I want to retire in two years. I want to use the re-contribution strategy and put $300,000 of his super into mine, leaving him with $150,000. I have $550,000 in my super. We would apply for a part pension for him when I retire but would still need to take some money out of my super, which I will leave in accumulation mode. Are any occasional lump sum withdrawals I make from super considered as income, and would I have to include the money in my tax return? Will my super affect my husband's part pension?
Money in superannuation in your name will not be assessed by Centrelink until you reach pensionable age unless you start a pension from it. It makes sense to leave the money in accumulation mode until you reach pensionable age. Once you have retired you could make irregular withdrawals as needed and they will not be regarded as income, nor will there be any tax consequences. Your husband's pension shouldn't be affected.
We have just sold the family home that was held in my wife's name only. We'll have about $1M residual to put somewhere after a downsizing purchase. We're both over 65 and permanently retired - my wife has never had a super account. Is it possible for us both to contribute $300,000 into super?
John Perri of AMP Technical says provided you both resided in the house being sold for at least 10 years, both of you should be eligible to make downsizer contributions into super up to $300,000 each (if all other conditions are met).
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com