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Dual structures: the ‘ideal retirement strategy’?

retirement strategy

In the wake of the super changes, it's clear that a dual trust and SMSF structure is the best retirement strategy, a superannuation planner has argued. 

Special Counsel at SUPERCentral, Brian Hor has said that while it’s too early to know the impact of last July’s changes to super on family trusts, he has seen a “significant increase” in the use of trusts in the last five years.

Noting that family trusts have “always been” important structures when it comes to business, tax and estate planning, Mr Hor said the fact that tax-free pensions amounts are now capped, while transition-to-retirement income streams are also no longer tax-free means that the “ideal retirement strategy is now a dual structure”.

He identified this as a structure containing an SMSF for tax-free income up to the transfer balance cap (TBC), joined with a family trust which hosts the excess funds.

The appeal of family trusts lies in the fact they do not require a sole-purpose test, they don’t face as stringent limits on trust membership and who can be beneficiaries and to whom distributions can be made, Mr Hor said.

Further, family trusts are not subject to as a tight restrictions as SMSFs when it comes to conditions of release, investment options, borrowings and transactions with related parties.

With this in mind, Mr Hor said that while the super changes don’t mean “the end” for SMSFs as they still attract low tax on earnings in accumulation, the best retirement strategy is a dual structure.

He gave this example: “For example, a non-working spouse and two kids at university with the Low Income Tax Offset can receive around $60,000 per year tax free on $1.2 million invested at 5 per cent in a family trust – a saving of $9,000 per annum as compared with paying 15 per cent on those earnings in a super accumulation account.

“A family trust is also useful if you need greater flexibility in terms of access to your funds, and the ability to gift or lend funds as compared to super.”

With this in mind, however, he said family trusts do need to be checked and updated regularly to comply with changes in the law and family circumstances.

“At the very least an existing trust deed needs to be reviewed for reasons such as: the trust deed may be too inflexible (especially as regards the power of appointment of the trustee, or power to amend the trust deed); the trust deed may be incorrectly drafted (e.g. it may contain the wrong parties – or it may even be invalid from the start!),” Mr Hor said.

Trust deeds should also be checked as: “The trust may be close to vesting (or may even have already vested); or the trust deed may simply not say what you think it does – especially regarding who are the beneficiaries, or the exclusion of so called “notional settlors”.

Dual structures: the ‘ideal retirement strategy’?
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