Critical Components of SMSF Estate Planning

You may have seen in the news recently the Women and SMSFs report, jointly released by the CBA and the SMSF Association, indicating that more than half of SMSF members do not have an up-to-date Will or a succession plan. The research report surveyed 801 SMSF trustees, as well as 535 individuals without an SMSF, and found that while 78 per cent of them have a Will, only 49 per cent actually have one that’s up to date.

That’s just for starters. Not only do SMSF members need to have an up-to-date Will - EVERYONE who is a member of a SMSF needs to also put into place an Enduring Power of Attorney.

This is because if a member loses their mental capacity, perhaps through having a stroke or becoming a sufferer of dementia, they will no longer be able to be a trustee of their fund, or a director of the corporate trustee of their fund – putting at risk the complying status of the fund.

If they do not address the situation within the 6 month period of grace allowed under section s17A(4) of the Superannuation Industry (Supervision) Act 1993 (“SISA”), the consequences for the fund and their retirement savings will be very serious indeed.

On the other hand, if all fund members have an up-to-date Enduring Power of Attorney, it makes things much easier in the event that:

• a member loses capacity – because their enduring attorney can become the trustee or director of the trustee in their place under sec 17A(3) of the SISA; or

• a member departs overseas indefinitely – because their (resident) enduring attorney can become the trustee or director of the trustee in their place to avoid fund residency issues under subsection 295-95(2) of the Income Tax Assessment Act 1997.

However, you need to ensure (on an ongoing basis) that the person nominated as enduring attorney is not a disqualified person (eg, someone convicted of an offence involving dishonesty) otherwise they will not be able to act as trustee or director of the trustee in place of the member.

Another absolutely essential estate planning tool that all SMSF members need to have is a Binding Death Benefit Nomination (“BDBN”).  This is because a Will does not automatically deal with an interest in a superannuation fund, since an SMSF is a separate trust so that its assets are not part of a member’s personal estate.

Therefore the only way that a member can dictate to whom their super death benefits will go is via a BDBN. Depending on the terms of the trust deed for the SMSF, such BDBN can be:

• binding upon the trustee, which is especially important in circumstances where the trustee of the fund may have a conflict of interest because they are themselves an eligible person to receive the deceased member’s super death benefit (as was the situation in the case of Katz v Grossman [2005] NSWSC 934 where a daughter of the deceased member used her discretion as the surviving trustee of the fund to give the member’s whole death benefit to herself, in spite of her father’s non-binding nomination that the death benefit be shared equally between the daughter and her brother);

• non-lapsing, in that it does not need to be renewed every three years (as is often the case with a public offer retail fund), plus it will still be effective if the member loses capacity in the meantime;

• cascading, in the sense that it can specify alternative or substitute beneficiaries in the event that a nominated beneficiary did not survive; and / or

• conditional, in that benefits can be expressed to apply subject to any special conditions or under certain circumstances (such as providing a pension to a surviving second spouse for their life or until they re-married, whereupon the death benefit would then be paid to the member’s estate to be dealt with under their Will).

So clearly proper and comprehensive estate planning is necessary for everyone who is a member of a SMSF, and requires at least the following critical components which should be prepared in accordance with an overall estate planning strategy:

• an up-to-date Will;
• an Enduring Power of Attorney; and
• a Non-lapsing Binding Death Benefit Nomination.

Ideally each component should work consistently with each of the other components. For instance, if a client wishes their SMSF death benefit to go 50% to a surviving adult child and the other 50% to the children of a deceased child (ie, their grandchildren) who are not financial dependants of the client, the client could make a non-lapsing BDBN giving 50% of their death benefit to the surviving adult child and the other 50% to their legal personal representative of their estate. Then in their Will they could make a gift of the super death benefit received from their SMSF to their grandchildren – or even better, to a Testamentary Discretionary Trust with their grandchildren included as potential beneficiaries to provide both asset protection as well as significant ongoing tax savings in relation to their inheritance.

For more information or further clarification please contact SUPERCentral on (02) 8296 6266 or email info@supercentral.com.au.