A death benefit eligible termination payment is a payment made by the deceased’s employer for unused sick leave, a gratuity, or golden handshake following the employee’s death. The payment is made either to the deceased employee’s estate or directly to a beneficiary.
Payments to the deceased employee’s estate are generally taxed to the trustee (executor of the estate) at the same tax rates as if the payment went directly to a beneficiary.
The tax payable on a death benefit employment termination payment depends on whether the beneficiary is a death benefit dependent or not, and also the total amount paid.
A deceased person’s death benefit dependents include their spouse (who can be the same or different sex), children under the age of 18, a person who is financially dependent, or a person with whom the deceased had an ‘interdependency relationship’ e.g. close friends sharing a house.
Up to $190,000 can be paid to a death benefit dependent tax free. In contrast, if paid to a non-dependent it will be taxed at a maximum tax rate of 32%. The amount of death benefits received in excess of $190,000 is taxed at 47% to all beneficiaries.
If the total death benefit eligible termination payment paid is going to be larger than $190,000, it should be paid by the employer directly to the relevant beneficiaries, rather than to the relevant executor. This is because each beneficiary then gets the benefit of up to $190,000 tax free, whereas the executor only gets $190,000 in total tax free.