SMSF Estate Planning
Most of our clients love self managed superannuation funds (“SMSFs”) because of the wide range of tax effective estate planning strategies that can be put in place through these wonderful vehicles. With recent super reforms SMSFs are now true intergenerational wealth transfer vehicles. The beauty of them is that, if things have been set up right, the wealth can be transferred tax free to the spouse, the next generation and even the generation after that provided we can establish dependency including financial dependancy.
These strategies cannot under any other circumstances be replicated through a will, testamentary trust or family trust. So let’s take a quick look at the world of estate planning in a SMSF. For those of you who would like to know more watch the video below.
What’s important to you in the event of your death?
This is the best question to get us started on the quest of developing a comprehensive, strong and effective estate plan in a SMSF. Possibly a better question may be:
What’s important if you and your spouse had died together yesterday?
If you have time, write down the five or six most important things and then rank them. What is number one, number two and so on? When developing any estate plan, attention should be paid to the most important things on the list not those that take up number five or six or don’t appear at all. If we can get this right then we have a great framework to build a SMSF estate plan.
Danger: SMSFs are excluded from your will!
Many clients are surprised to find that their will is completely ineffective when it comes to disposing of their superannuation benefits on thier death. They assume that because they have made provision for the passing of their superannuation benefits in their will that this will happen. Poor assumption! There was a well publicised case in the NSW Supreme Court in 2005 – Katz v Grosman where a father had left $1M in the family SMSF. His will provided that all of his worldly possessions were to be passed to his son and daughter equally. Prior to his death, the father made his daughter a trustee and member of the family SMSF. The son had not yet become a member/trustee. As the only trustee of the fund and knowing that her father had not made a special binding SMSF estate plan, the daughter paid out the $1M in benefits to herself, excluding her brother completely. The NSW Supreme Court deliberated on the case and held that she was in her rights as trustee to pay her father’s benefits to her as this was allowed for in the fund’s trust deed. The argument that the superannuation benefits were to be split equally in accordance with the will held no weight as wills are based upon State law not Federal laws which govern superannuation.
Some important SMSF estate planning rules
There are three basic rules to follow when creating your SMSF estate plan:
1. Who controls the fund?
As we saw above whoever controls the family SMSF on death controls the passing of a member’s benefits in most instances. For control look to the trust deed – what does it say happens when the trustees meet? Does everyone get one vote? Remember these are intergenerational funds so our children will end up being in them. Should they have the same voting power as you? Are you happy to hand over control to them on day to day matters and certainly in the event you become disabled or on your death. Unfortunately 99% of SMSFs are deficient in the area of control. If you have one of our latest trust deeds then there is built in protection for a member’s interests by firstly handing out voting power according to the size of a member’s benefits in the fund and secondly by ensuring that a deceased member’s executor is automatically appointed as deceased member’s replacement trustee of the fund to ensure that their wishes are effective. No other SMSF trust deed provides these simple but vital SMSF estate planning mechanisms. If you have not upgraded your trust deed since 2011 or are not using our recommended trust deed – you and your family are exposed!
2. A corporate trustee is a must
I still see too many SMSFs where the members of the fund are acting as individual trustees. This means that on the death of any member of the fund, the remaining trustees must contact all registry offices, land titles and other registries to notify them of a change in trustees. The superannuation laws and the ATO require the trustees to register the assets of the SMSF in the names of the trustee. A corporate trustee, which has an infinite shelf life just like the SMSF, is the best choice for the fund as on the death of a member, it only requires a change in directorships not a change in trustee. They are not expensive to run or maintain as all they do is look after the trusteeship of the SMSF.
However like the trust deed, the corporate trustee must ensure that the directors have voting power equal to their member superannuation benefits. Likewise the deceased member’s executor should automatically be appointed as a replacement director of the deceased member. At this stage our company has a special purpose SMSF trustee company that offers these mechanisms.
3. Certainty in passing of benefits
Unless a member of a fund has put in place a binding nomination or the latest strategy of writing the passing of superannuation benefits into the rules of the fund, the remaining trustees of the fund can do whatever they like with a deceased member’s benefits. As seen in the court case above, they can pay it all to themselves, particularly if they control the voting power of the fund thanks to a poor SMSF trust deed.
A binding nomination used to represent the latest in SMSF estate planning but the Commissioner of Taxation put a spanner in the works stating that the laws on binding nominations do not apply to SMSFs unless the trust deed says otherwise. Our latest SMSF deed provides this and for those with an older deed then we can change the deed over as simply as changing the tyre on your car.
For absolute certainty we highly advise that we write your estate planning wishes into the rules of the fund. The benefit of this strategy over a binding nomination is that it allows the deceased member to direct where, how and how much benefits are to be paid. If you have not completed even the most basic of estate planning around your membership of your fund or are looking to provide a detailed chain of wishes and events if you pass away then please contact The Money Edge Team today on 07 4151 8898 to put a plan in motion.
This is a good point to stop and ask – what certainty do you have with the passing of your superannuation benefits?