Planning for the terminally ill: case study

Dave, 50, has been diagnosed with liver cancer and has been told he has only six months to live. He needs money for medical treatment and help around the house for his wife. At the same time, he wants to ensure his family are adequately provided for after his death.

Dave is married to Daphne and has two children under 18. He worked as a sales executive and his employment was terminated on June 30, 2002, as a result of his illness.

He has $600,000 in superannuation (all post June 1983) plus $900,000 death cover through the fund. The death cover includes a terminal illness option (ie. a prepayment of the death cover).

Dave’s eligible service up to June 30, 2002, is 2,500 days. The number of days between June 30, 2002, and when Dave would have turned 65 is 5,480. His available pension RBL is $1,124,384.

Strategy

Dave, in conjunction with his financial adviser, should contact the superannuation trustee as soon as possible to:

n see if he can access the terminal illness option in his life cover;

n trigger the permanent incapacity condition of release for his superannuation savings (as Dave is under 55, he can’t cash out any super without this);

n try to establish a post June 30, 1994, invalidity component (only available to employees).

There may be benefit in undertaking all three things simultaneously to save unnecessary doubling up (eg. medical reports).

Scenario 1

Dave qualifies for an invalidity component + terminalillness benefit.

From a tax perspective, this is the ideal outcome. After the terminal illness benefit is paid to the fund, Dave would have $1.5 million in the super fund. The invalidity component would be $1,030,075 (assuming conditions have been met).

$1,500,000 (ETP) x 5,480 (days from termination until retirement)

7,980 (total service days if taxpayer had worked until retirement)

This invalidity component can be cashed out tax free, regardless of whether it is withdrawn pre-death or paid out as the result of death. Likewise, it doesn’t count towards Dave’s RBL. So Dave could cash out the entire $1.5 million without paying any excess tax. Likewise, he could leave it to his family, without incurring an excessive component above his pension RBL.

It should be noted, the invalidity component needs to be crystallised pre-death and this can only be achieved by creating an eligible termination payment (ETP) — either by cashing out or rolling over the funds to another superannuation fund.

Scenario 2

Dave qualifies for an invalidity component but notterminal illness benefit.

If the terminal illness cover is not paid out to the fund prior to death, the invalidity component would be $412,030 (assuming conditions have been met).

$600,000 (ETP) x 5,480 (days from termination until retirement)

7,980 (total service days if taxpayer had worked until retirement)

Care needs to be taken with this option to ensure continuity of Dave’s substantial insurance coverage (ie. leaving enough money in the fund to pay the premiums).

In this situation, Dave could cash out the entire $600,000 without paying any excess tax (ETP tax would apply to the non-validity component). In addition, the final payout to his family would be below his pension RBL, so would incur no excess tax.

Scenario 3: Dave dies before he can crystallise hisinvalidity component

Any money that Dave cashes out from his superannuation fund will count both towards his RBL and be taxed at 21.5 per cent (because he is aged under 55). So Dave should only cash out the funds he really needs. Also, the superannuation pay out to Dave’s family after his death if cashed out will include a substantial excessive component ($375,616) that will be subject to 48.5 per cent tax. However, if taken as an income stream from Dave’s fund, the payments to his children (both aged under 18) should have no impact on their future RBL and will be 100 per cent rebatable, while the payment to his wife will be assessed against her personal RBL. Dave should also consider making a binding nomination to ensure his nominated beneficiaries receive his proceeds on death.