What Is a Deathbed Withdrawal?
In superannuation and estate planning, a deathbed withdrawal means taking your superannuation out as a lump sum shortly before death. Some people consider this strategy to reduce the tax that their beneficiaries might have to pay.
It can be an option for those who can legally access their super — usually people who are retired or over 65. However, there are several issues to consider before taking this step.
The Tax Issue
The main question is simple: Will a deathbed withdrawal save tax?
The answer: Maybe.
Superannuation paid to a spouse or a child under 18 is usually tax-free. Someone in an interdependency relationship may also receive the superannuation tax-free.
But if your super is going to a non-tax dependant, such as an adult child, it may be taxed at 17% on the taxed element and 32% on the untaxed element (including the Medicare levy). If you can withdraw the super before death, that amount may be passed to your adult children tax-free.
If the benefit is paid to your Legal Personal Representative (your executor) to be distributed under your Will, things become more complex. Tax depends on who receives the final distribution. For example:
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If 50% goes to a spouse, that portion is tax-free.
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If 50% goes to an adult child, niece, or nephew, that part may be taxable.
Messing Up the Estate Plan
A last-minute withdrawal can overturn a carefully designed estate plan. A sound estate plan can:
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reduce the risk of claims against the estate,
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create a testamentary discretionary trust that can last up to 125 years in Queensland,
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protect funds for your spouse and children,
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keep assets safe from a beneficiary’s bankruptcy.
A deathbed withdrawal can potentially mess up some of the above goals. (If you’re unsure which one, you should not be withdrawing super on your deathbed.)
Superannuation and life insurance often form the backbone of an estate plan. Any discussion about withdrawing super should always involve your estate planning lawyer.
Other Issues
There are several other risks that make early withdrawal a decision that must be handled with care:
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Life insurance: Withdrawing super may cancel your life insurance, leaving your beneficiaries with much less.
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Recovery: People sometimes make unexpected recoveries from illnesses. If you have withdrawn your super, you may lose concessional tax treatment permanently.
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Enduring power of attorney: If you are acting as an attorney and you authorise a withdrawal that changes someone’s entitlement under the Will, you may breach your duties. Attorneys have the right to see the Will and arguably an obligation not to interfere with it.
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Reversionary pensions: If your account is in pension phase, it may revert to a tax dependant, giving them tax benefits.
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Income vs capital: Taking a lump sum directly from super is often treated as income. Receiving it through the estate is usually capital. Treating it as income may affect childcare subsidies, pension payments, or trigger Division 293 tax issues.
Get Legal Advice
This is a high-stakes area. Strategic planning and proper legal advice are essential. Poorly handled withdrawals can destroy the estate plan, create family conflict, or even increase the tax burden you were trying to avoid.
Never attempt a deathbed withdrawal without speaking to your estate planning lawyer. What seems like a last-minute tax benefit may cause a legal mess — and could end up costing far more in the long run.
