Q&A - Terminal illness and our superannuation and tax position October 27th, 2022
We are a same-sex couple in our late fifties and my partner has recently been diagnosed with an illness that is likely to be terminal but at this stage, we are not sure. We face several months of treatment. It is complicated because when coming together, we agreed to keep our finances separate as we both have adult children from previous relationships. I have been told that there are changes to her superannuation we can take to improve the tax position for her children, but we are unsure what that might be.
Can you provide any suggestions?
Can I get my question answered?
I am very sorry to hear of her illness and hope that the treatment is successful.
There are a couple of things to note and steps you can take. If the super fund has life-insurance then it is very likely that your partner can claim that now.
This would require two medical professionals to state that the condition is terminal within the next 2 years. The insurance payout is then added to her existing balance and she would be able to access it all tax-free at any time. She could however, elect to keep it in her super fund.
If the treatment is successful, there is no requirement to return the insurance money to the insurer.
If the treatment is not successful, then it would be desirable for her to withdraw the money and place it into her bank. In this case, her Will would determine how the money is to be distributed, assuming that her Will is current and up-to-date. This ensures that no tax is payable because if the benefit is distributed by the super fund to non financially dependent beneficiaries, in this case her adult children, tax of up to 15 percent may be payable on some of the money.
The second option is to recognise that there are no tax benefits under your current arrangements when you partner passes, no matter when that occurs. Typically, couples nominate each other as the beneficiary of their respective superannuation funds. Because there is almost always a financial interdependency inplace, the superannuation money passes to the partner tax-free. This doesn't apply in your partner's case, because she wants the money paid to non financial dependents.
The trick, is to reduce the portion of her super that might be taxed at 15 percent by boosting the portion in her fund that is tax exempt.
Once she reaches 60 years of age, she could withdraw up to $330,00 which would be tax free. She could then use special bring-forward rules and re-contribute the $330,000 as a non-concessional contribution back into super. It sounds messy but in effect, she has boosted the amount that will come out of her account tax free by $330,000, whenever she dies.