Professionals / SMSF / SMSF Strategy / Trustee education

Important questions in developing an SMSF estate plan

A lot of time is spent by trustees and professionals alike developing wealth through strategies and investment choices.  But far to often we see a lack of estate planning ultimately undo all the hard work that has been achieved over the life of the fund.

Case law such as Katz vs. Grossman and Donovan vs. Donovan are timely reminders that trustees and advisers need to give appropriate consideration to their overall estate plan, which needs to include how to deal with their superannuation in the event of death.

Too often I hear throw away lines of “the kids can sort it out” or “it’s not my problem if I’m not here” or “it will be all spent before they can get their hands on it”.  With the average Self Managed Super Fund balance now being higher than the average price of a family home, this issue needs to be given the appropriate attention is deserves.  For advisers, not appropriately addressing this issue when your “DNA” is all over the fund will only present problems later on when payment of the estate occurs.

Therefore to assist in fleshing out some of the key issues for trustees and their advisers, consider some of the following key questions that should be considered for every fund and its members:

1. What arrangements need to be put in place to pass control of the SMSF on death or incapacity of the members?

You need to consider issues such as the fund’s governing rules to allow for the legal personal representative to act as a replacement trustee and have the same rights as the deceased member/trustee to deal with their benefits. Considering an appropriate death benefit nominations is obviously of utmost importance, along with appointing an Enduring Power of Attorney who can step into the shoes of a trustee/member in varying circumstances (including incapacity).

2. What strategies can/should be employed to deal with estate taxes on superannuation benefits (i.e. taxable component, CGT within the fund)?

Consideration here needs to be given to strategies to reduce the taxable component of a member’s benefit, including recontribution strategies, multi-pension strategies and the use of anti-detriment reserves.  Strategies can also be used within pension phase to crystallise CGT on certain assets to reduce the future financial impost of CGT.

3. What will be the best way to pay a death benefit – pension or lump sum – are there specific provisions needed in the Deed to facilitate such options?

There are more options available within an SMSF than any other superannuation vehicle in Australia.  Whilst there is the ability to simply pay a reversionary pension to a spouse, consider more specific strategies such as:

  • a fund wishing to provide for a non-commutable income stream of no more than $30k per annum for two children up to age 25; or
  • the ability to pay an in-specie lump sum of the business premises to the son working in the family business.

The strategies really know no bounds…

4. Are potential death benefit beneficiaries in need of “protection”? If so, what strategies/options are available to safeguard against a vulnerable, incapable or insolvent beneficiary from losing/wasting a death benefit amount?

You need to seriously consider issues such as the impact of handing a cheque over to a 20 year old drug addict child or how to best structure providing for the benefit of a disabled child (which can be achieved through an income stream via the SMSF).  Issues such as creditor risk becomes very important, as does marital risk which appears to be something of growing importance across fund trustees.  For example, there is nothing within superannuation law that says you can’t include a clause within the trust deed to exclude particular people or class of people.  Exclusion of in-laws may be an obvious one here!!  This exclusion could relate to the ability to act as a trustee, member or beneficiary of the fund.

5. Which form of nomination is most appropriate – binding or non-binding, lapsing or non-lapsing? or should the member create a SMSF Will where the death benefit instructions become a rule of the fund?

The fund’s governing rules (trust deed) are important here, but not all deeds are the same.  The use of an off-the-shelf solution for a trust deed is not always the best outcome as it might not provide for a SMSF Will or a non-lapsing binding death benefit.  Conversely, the trustees may think it is in their best interests to review and renew every 5 years.  The discussion around some of these issues potentially needs to be given greater consideration before the fund is operational.  Professionals need to be cognisant of what type of nominations are available to be paid in accordance with the deed and in what form they need to be provided.

6. What further documents i.e. Will, Enduring Power of Attorney (EPoA), etc need to be signed to meet the members estate planning wishes and objectives?

This comes to the very heart of the issue with estate planning.  Too often I see people who think a basic Will and standard death benefit nomination as being the total solution to their estate plan.  This quite simply  not true.  Appropriate consideration to Enduring Powers of Attorney, Guardianship, Wills including the use of testamentary trusts all form an important part of the overall estate plan.  Remembering that the goal is to integrate appropriate transition of wealth from an SMSF to the estate where benefits can no longer be held within the super environment (and in the most tax effective and protective way possible).

7. Do the governing rules of the fund (trust deed) complement the member’s Will and Financial PoA?

It has been mentioned earlier, but the importance of having the right trust deed in place cannot be stressed enough.  It is important to consider issues such as voting rights of each member – is it 1 x vote each or vote per $ of account balance?  does the deed allow for the LPR to have all the same rights and conditions of the deceased member to make decisions regarding the payment of death benefits, the list goes on…

These questions are very much ‘tip of the iceberg’ stuff when it comes to fleshing out the key issues for members of a SMSF.  But by using these questions, I am sure that it will provide a foundation to be able to put in place a sound SMSF estate plan.

I’ll leave you with an interesting statistic I recently heard…  The average life expectancy of a person dying without a Will is 62.  The average life expectancy of a person dying with an estate plan is into their 80’s.  Therefore, whilst it makes financial sense to get your SMSF and estate planning affairs in order, this age statistic is compelling enough to do something about it right away!!

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