Don’t Let Estate Planning Strategy Jeopardise Beneficiaries’ Access To Child Care Subsidy

It’s often overlooked by clients and estate planning lawyers alike, but it’s important when acting for clients with adult children to ensure that we don’t inadvertently put the adult child beneficiary’s childcare subsidy at risk when devising the superannuation death benefit strategy.

How can super affect the Child Care Subsidy (CCS)? 

The CSS is very important for many families with young children. However, a client’s decision about how to direct their superannuation death benefits via their Binding Death Benefit Nomination (BDBN) to benefit their adult child can have disastrous consequences and remove the adult child's eligibility for the CSS.

When the super death benefit is paid directly to the adult child from their parent’s superannuation fund, the adult child must report the lump sum death benefit in their family income estimate for that financial year. Receiving a large amount, for instance, $200,000, will significantly inflate the adult child’s income, causing them to exceed the relevant eligibility threshold for the CSS for that financial year.

If the client instead directs the superannuation death benefit, via a BDBN, to their legal personal representative (i.e. the technical phrase for paying it to their estate for distribution under their will), the gift is not included in the reportable family income and does not impact on the CSS threshold.

Such a small change can have drastic consequences for an adult child relying on the CSS! 

Directing the superannuation death benefit directly to an adult non-financial dependent beneficiary can not only jeopardise their CSS, but it is also factored into the income calculation for Division 293 tax and incurs the additional 2% Medicare Levy.

Pros and Cons of Paying Super to the Beneficiary Versus the Legal Personal Representative

While paying the superannuation death benefit to the legal personal representative for distributing under a client’s will can protect an adult child’s CSS entitlements and avoid the impost of the 2% medicare levy, there are some disadvantages:

Because the death benefit has to pass through the estate, the process of administration and finalisation can take significantly longer, meaning the beneficiary must typically expect greater delay than if the funds were paid directly to them from the super fund.

In jurisdictions other than New South Wales, paying the superannuation to the legal personal representative can bring the superannuation death benefit into the pool of assets available to satisfy any challenge against the will, whereas it would not be exposed to such a risk when it is paid directly to the beneficiary from the superannuation fund.

There are other issues around the sophistication of the binding nomination and contingency planning, particularly if the super is held within a public offer or industry fund. 

So as estate planning lawyers, it’s important to evaluate the competing advantages and disadvantages when it comes to advising a client whether to make a binding nomination directly to the beneficiaries or to the legal personal representative. 

As always when it comes to superannuation, collaborating with a client’s financial adviser about the financial considerations remains vital to achieving a holistic and comprehensive outcome for the client’s estate planning.

BDBN Templates For Lawyers

Here at The Art of Estate Planning, we have Binding Death Benefit Nomination Precedents for SMSFs. As part of this BDBN precedent package for lawyers, we have a number of white labelled template flyers which assist to explain the competing considerations on crafting the appropriate death benefit strategy.

This precedent package is loaded with tools to support lawyers to communicate the complex superannuation rules clearly and straightforwardly to clients so that they're empowered to make the choices that best achieve their goals.

The next time you are assisting a client prepare their super death benefit nomination, I hope this post plants the seed to remind you to ask your clients’ whether maintaining any adult children’s CSS is an important consideration.

In Episode #3 of the The Art of Estate Planning Podcast, we expand further on super strategies and the CSS.