Retirement Income Stream Estate Planning Issues
What issues are relevant for estate planning?
Inevitably, as we approach retirement or are already in retirement, we start to think more about family issues. Estate planning is the term that is generally given to planning your family affairs so that in the event of your death, your wishes are both clearly outlined and administered the way you intended them to be.
This includes considering issues such as:
- Do you wish to leave money to your estate, remembering your current needs?
- If you wish to leave money to others, how much is appropriate, given your level of assets and current needs?
- If you wish to leave money to others, how do you best direct money to them?
These are common questions and your requirements in these areas will no doubt vary over time.
Your Will
One of the key parts of estate planning is your Will. This is the document that sets out who you want your money to go to. Many people do not have a Will. If you die without a Will, State laws determine who gets the proceeds of your estate. For example, if you are married without children, your assets will pass automatically to your spouse. This may or may not agree with your wishes.
Anyone with experience in dealing with estates would strongly recommend that you have a current Will, as its existence will certainly assist any family members that you pre-decease. If you are part of an 'extended' family it is vital that you have a Will.
When you establish a Will you will also set out who is to be appointed as your executor or executors. This is the person or persons that you are entrusting with the job of looking after your affairs until your estate is distributed to your nominated beneficiaries. The selection of this person is an important decision. The person can be a member of your family, a friend - or for example, your solicitor or accountant.
Income streams and your estate
- As your retirement income stream entitlements are part of your assets at the time of your death, it is important to consider these benefits as part of your estate planning.
- If you have a partner, usually the first issue to consider with income streams is whether you wish to have the income stream continue directly to them on your death. We have mentioned that it is possible to ensure that an income stream (usually referred to as a reversionary income) is payable to your partner in the event of your death. This is one of the important choices that you have to make when investing in, or commencing to receive, an income stream.
On the other hand, if you are single or you simply do not wish to set up a reversionary income stream, then you can consider nominating a dependant to receive any lump sum benefits payable on death.
There are different estate planning issues to consider, depending on the income stream selected and whether or not it is purchased with 'superannuation money' or other savings. This is one area where a financial planner can be of great assistance.
For example, where the trustee of the superannuation fund from which your pension was being paid decides to pay any death benefit to your nominated dependant(s), then this amount will not form part of your estate. The benefit will simply be paid from the superannuation fund directly to your nominated dependant(s).
In many cases, this would achieve the same result as not making a nomination and having the benefits become part of your estate. This is the case where your spouse is the recipient of any death benefits - either way you arrange it you will achieve the same result.
One advantage of making an appropriate nomination with your superannuation fund is that the trustee can elect to pay any benefits directly to your spouse rather than through your estate. This can avoid delays that can arise with the winding up of your estate or dying without a Will.
While the trustee of your superannuation fund is not bound to follow any specific nominations upon your death (unless you have lodged a binding nomination with the trustee), they will have regard to them when deciding to whom benefits are to be paid.
The following table summarises the options for nominating how your incomes stream benefits can be handled upon death:
| Income Stream Type | Estate Planning Options | Is Death Benefit part of the Estate? (Yes/No) |
|---|---|---|
| Pension |
|
No No Yes or No (depends if nominations exist) |
| Annuity |
|
Yes or No (depends)
No No Yes |
*The above table assumes that a beneficiary exists at the time of death where a nomination is made, otherwise any benefits will be paid to your estate.
Reversionary income streams can only be payable to a spouse or a child. The child must be either under 18 or under 25 and in full time studies. Where income stream payments are made to a child they must cease by age 18 if not in full time study, or by age 25 for a child in full time study.