When setting up a self-managed superannuation fund (SMSF), the focus is usually on how to best structure the fund’s investments in a tax effective manner to maximise the benefits for retirement. However, many people overlook how to effectively plan for the transfer of their SMSF assets to their beneficiaries when they die. It is important to plan ahead to ensure the right people will receive the superannuation death benefits and take control of the SMSF when you pass away, explains Attwood Marshall Lawyers Wills & Estates Partner, Angela Harry.
Self-managed superannuation funds (SMSF) are extremely popular and hold significant wealth for many Australians.
The statistics released by the ATO at 30 June 2021 reveal that almost 598,000 self-managed superannuation funds exist, with over 1 million members holding approximately $822 billion in wealth.
This accounts for 25 per cent of the $3.3 trillion in superannuation assets under management generally.
As the popularity of SMSFs continues to increase, it is important to understand not only how to build wealth for retirement, but how to deal with these assets after you die, including who will control the SMSF and how they distribute the assets of the SMSF on the death of the member.
Self-managed superannuation funds can be complex structures when you consider not only the ongoing compliance of operating a fund but also the documentation required to deal with the member benefits as part of someone’s personal estate plan that is mainly dealt with in their Will. Unlike your personal assets, assets that are held within the SMSF are not something you can simply deal with in your Will. This is a very important point to understand – the SMSF has a ‘life’ of its own in a strict legal sense. Although your Executors step into your legal shoes when you die, that does not mean they will control your SMSF or the assets that are in the fund.
Top 5 things to know about SMSFs and succession
1. Superannuation is considered a “non-estate asset”
Self-managed superannuation funds serve as a great vehicle for holding wealth in a tax effective environment. One of the most common misconceptions people have about self-managed superannuation funds is that these can be treated in the same way as other assets an individual may hold in their personal name, such as real property, shares, or money in a savings account. From an estate planning perspective, it is important to understand how your superannuation is dealt with on your passing. Many superannuation members do not realise that technically you do not own your superannuation. The superannuation death benefits are held by the fund’s trustee. It is up to the trustee to determine how to deal with the benefits on death, subject of course to the fund’s trust deed and the terms of any binding or non-binding nominations in place.
Usually, the surviving member of the SMSF will effectively ‘control’ the assets in the fund, but if there are no surviving members, your Executors will usually step in as the trustees and decide what happens with the assets. It is very important that you carefully discuss these issues with an experienced estate planning lawyer who is familiar with SMSF succession issues and select the right Executors! It is also important to discuss these issues with your accountant who looks after your SMSF.
Tip # 1: Get the right estate planning and taxation advice about the SMSF before you do your Will!
Read more: Understanding assets that you cannot leave to your beneficiaries in your Will
2. Death Benefit Nominations help you control who will receive your superannuation benefits on death
Members have the option to put in place a binding, or non-binding, nomination which provides a direction to the trustee of the superannuation fund of how the member benefits are to be distributed on death. The binding nature of that document means that the trustee cannot override the member’s direction, assuming the nomination is valid.
The ‘death benefit’ includes both the member’s contributions as well as any insurance held within the fund.
There are several different options available when deciding death benefit arrangements, each has its benefits and purpose. Ultimately, whether a binding nomination or non-binding nomination is appropriate will come down to the member’s individual circumstances and that of their family/loved ones.
The types of nominations available include:
- Binding nomination: This type of nomination stipulates who is to receive a member’s benefits on death and is binding on the fund’s trustee (provided that the nomination is valid). A binding nomination can be in place for 3 years, but it will lapse, and members will need to complete a new nomination at this time. Just like a Will, a binding death benefit nomination should be regularly reviewed to take into consideration any changes to the member’s personal circumstances as well as those of the intended beneficiary (or beneficiaries).
- Non-lapsing binding nomination: This type of nomination works in the same way as a binding nomination, with the key difference being that it does not lapse unless it is revoked by the member.
- Non-binding nomination: A non-binding nomination is not binding on the fund’s trustee. It is merely an expression of the member’s wishes on who they want to receive their benefits on death. The trustee can exercise its discretion not to follow the member’s nomination if appropriate to do so.
- Automatic reversionary pension: This is a type of pension that is established by the fund member whilst still living that reverts to an eligible income stream dependant. In most cases it would be a surviving spouse who would receive the reversionary pension on the member’s death.
In the absence of a nomination, it is the fund’s trustee (i.e. usually the Executors in your Will) that exercises its (or their) discretion as to how and to whom the member’s benefits will be paid upon death. This decision may not necessarily be in line with what the member had wished for, which is why putting in place a nomination can be extremely important.
Tip # 2: Get the right advice on binding death nominations and who to appoint as Executors!
Read more: A binding death benefit nomination can determine how your self-managed superannuation funds are dealt with upon death
3. The SMSF Trust Deed
A self-managed superannuation fund is a form of trust. When looking at the operation of the SMSF, including both the management of the fund during the member’s lifetime as well as paying out the member’s benefit on death, these are matters that are determined by the governing rules of the SMSF deed as well as the requirements of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), and the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regs).
The Trustee must be aware of changes to legislation where it is relevant to the operation of the fund. They must also keep the fund’s trust deed up to date and ensure the deed complies with the rules as outlined in the legislation.
The trust deed will contain not only the governing rules but also information that includes the name of the fund and the trustee/s, the rules governing contributions and the rules governing the payment of benefits.
For example, to determine whether a member may make a death benefit nomination, including the type of nomination and the requirements to ensure the validity of that nomination, this would be covered in the trust deed. The first step is always to READ THE DEED. Unfortunately, in practice it is all too common to see standard beneficiary nomination templates that have been ordered ‘off the shelf’ or downloaded from the internet. These nominations are often prepared with no regard to the terms of the SMSF deed.
It is very important to ensure your accountants and estate planning lawyers regularly review and update your SMSF deed so that it can be properly relied upon after you die, and the fund needs to be wound up. Things can get very messy (and expensive) if the deed is out of date or the trustees have conducted themselves in breach of the terms of the deed.
Tip # 3: Review your SMSF deed regularly and make sure it is up to date!
4. The trustees
Self-managed superannuation funds are controlled by trustees. You can choose one of the following structures for your fund:
- individual trustees
- a corporate trustee (essentially, a company acting as trustee for the fund).
Each member of an SMSF must be represented at a trustee level, either as an individual trustee or as a director of the trustee company. While an individual SMSF trustee may sound more straightforward, it may not be as efficient in the long-term. Generally, corporate trustees tend to provide greater advantages for succession planning.
If you have a corporate trustee, make sure the ASIC company fees are paid each year and that the directors are current with ASIC records. If you don’t pay the ASIC company fees, it can be deregistered and there is effectively no legal entity that is the trustee of the fund. You (or your Executors) must then re-register the company, and this can be a long and expensive process.
Tip # 4: Have a corporate trustee, but don’t forget to pay the ASIC fees each year!
5. Choosing suitable beneficiaries
For a death benefit nomination to be valid, one of the requirements is that the person/s mentioned in the notice must either be the member’s legal personal representative or a dependant.
Legal personal representative in this context is defined to mean the Executor of the Will or administrator of the estate of the deceased person.
Dependant in this context is defined to mean:
- The spouse of the person. Spouse is given a wide definition that includes a de facto and same sex relationships, registered or otherwise.
- Any child of the person. Child is also given a wide definition and includes an adopted child, stepchild or an ex-nuptial child of the person, a child of the person’s spouse, and someone who is a child of the person within the meaning of the Family Law Act 1975.
- Any person with whom the person has an interdependency relationship. This is defined as a close personal relationship of people who live together, where one or each of them provides the other financial support and one or each of them provides the other with domestic support and personal care.
Choosing the appropriate beneficiary is extremely important. An ill-considered choice can give rise to potentially avoidable problems. Beneficiary nominations are often made as part of the framework of the member’s estate planning needs and are usually considered in the circumstances of:
- what is the most tax effective structure for succession
- how to protect the superannuation proceeds for the intended beneficiaries
- mitigating the risk of a potential claim against the estate
- a way to make provision for beneficiaries who are not considered dependants under the Superannuation Industry (Supervision) Act 1993 (SIS Act). This means a member may be able to direct payments to non-dependants such as a niece, nephew, sibling, or charity.
Tip # 5: Get the right advice about eligible beneficiaries in the SMSF after you die and how best to ensure the assets end up with who you want them to. Sometimes paying funds directly to a beneficiary may not be the best way to deal with those assets!
Attwood Marshall Lawyers – Helping you plan for the future preserve your wishes
Most people understand what benefits or assets are held within their superannuation fund and have an idea of where they want to direct these benefits when they pass away. However, the complexity of these assets is often underestimated; it is not as simple as gifting a property to one child and transferring a share portfolio to another.
Self-managed superannuation funds are highly regulated, and the legislation governing this sector is often changing. Anyone with a self-managed superannuation fund should obtain suitable financial and legal advice, setting their fund up for success, and securing its future for the benefit of its beneficiaries.
An accountant, financial planner, and estate planning lawyer should be involved in all aspects of the planning, not only in the setup and ongoing management, but also the wind up on death.
Attwood Marshall Lawyers have a dedicated team of lawyers who practice exclusively in complex estate planning, including self-managed superannuation funds, and can help guide clients through the planning process to ensure they have all the right strategies in place to suit their specific circumstances.
To review your current estate plan, revise your SMSF trust deed, or put in place a death benefit nomination to protect your assets, contact our Wills and Estates Department Manager Donna Tolley on direct line 07 5506 8241, email email@example.com or free call 1800 621 071.