Newsletter:

Super News - Self Managed Superannuation Estate Planning Issues

27 July 2016

Shirley Schaefer, Partner, Superannuation |

YOUR SUPERANNUATION BALANCE IS LIKELY TO BE ONE OF YOUR MAJOR ASSETS.

Your superannuation balance is likely to be one of your major assets.

If you have a self managed super fund (SMSF), it is important to consider who will control the SMSF if you become incapacitated or die. Consider what arrangements you have made to ensure payment of your death benefit to your preferred beneficiaries. 

This is critical for everyone. If you have a blended family with children from prior relationships, if there is a risk that your Estate may face litigation, or if you are looking to pay your death benefit to someone that is not a superannuation ‘dependent’ additional care may be needed.

Loss of mental capacity:

A fundamental requirement of an SMSF is that all members of the fund must also act as trustees of the fund or directors of the corporate trustee. The trustees of the SMSF control the day-to-day decision making of the fund. As trustee of your SMSF, what will happen if you lose mental capacity? This could happen through disabling events such as an accident, stroke, illness or diseases such as Alzheimer’s?

If you lose mental capacity and do not have an enduring power of attorney (EPOA) in place, the result can be problematic to your SMSF and other members of the fund. Loss of mental capacity is likely to lead to cessation of your role as SMSF trustee.  This may be prescribed in your trust deed, or you may need to resign as trustee if you no longer meet the trustee requirements under the Superannuation Industry (Supervision) Act 1993 (SIS Act). Additionally, where there is a corporate trustee, the fund will need to comply with the company constitution and legislative requirements for the retirement and appointment of a company director.

If you lose mental capacity and have no EPOA, this could result in a situation where your benefits need to be withdrawn or rolled out of the fund to a retail superannuation fund. This may come about, as if you can no longer be a trustee of an SMSF, you can no longer be a member of an SMSF. If property is a significant asset of your SMSF, this can create liquidity issues for the SMSF and any remaining fund members. 

Consider the case of a ‘Mum and Dad’ SMSF where the major asset of the fund is the business premises for the family business. If mum lost mental capacity and had no EPOA, it could force the sale of the property, triggering possible tax and stamp duty liabilities, to enable withdrawal of Mum’s superannuation benefit.

The same risks apply to a single member or sole director SMSF. It is important that SMSF members put in place EPOA’s to allow the SMSF to continue in periods of loss of mental capacity.

Choosing the right person or people to appoint as your enduring power of attorney is critical and should be someone you trust implicitly to manage your affairs. It is important to get advice from an experienced professional to ensure that your enduring power of attorney is documented correctly and meets your objectives.

Death of a trustee/member of the SMSF:

It is important to be aware your superannuation death benefit does not automatically form part of your deceased estate. This means that unless you take specific action, your Will will not deal with distributing your superannuation benefits, moreover, as such, having a Will might not be sufficient to achieve your estate planning goals.

In an SMSF, if you were to die, the remaining (or replacement) trustees will have full discretion to whom they pay the death benefit too unless you have taken appropriate steps to document how you wish to have your death benefit paid. 

Consider Jill and Bruce, a married couple in their 60’s, both members and trustees of their SMSF. Bruce is Jill’s second husband. Jill has two adult children to her former spouse. Jill has indicated in her Will that she would like her Estate (including the superannuation death benefit) to be split equally between Bruce and her adult children. Jill has appointed Bruce as the legal personal representative of her estate.

In the absence of any further arrangements, the following scenario could easily occur:

  • Jill dies suddenly from an illness or accident
  • As Jill’s legal personal representative, Bruce acts on Jill’s behalf to fill her role as trustee of the SMSF, noting he is also the other trustee of the SMSF
  • Despite what the Will says, as sole controller of the SMSF, Bruce pays Jill’s death benefit to himself
  • There is nothing legally the adult children can do to prevent Bruce from paying the death benefit to himself. As sole controller of the SMSF and in the absence of any other documented measures, he has complete discretion to pay the death benefit out to himself. The terms of Jill’s Will are irrelevant when it comes to distributing Jill’s superannuation benefits.

Similar situations can occur with single member/trustee SMSFs.  

Consider Virginia; she is the sole member and director of the corporate trustee of her SMSF. Virginia has two adult children, Sarah and Peter. Peter has always struggled to manage his money, because of this Virginia has appointed Sarah as the sole legal personal representative of her estate. The terms of Virginia’s Will state that her estate (including her superannuation benefits) are to be split equally between Sarah and Peter. Upon Virginia’s death, Sarah steps into the role as director of the corporate trustee of the SMSF. In the absence of any further documented measures, Sarah has complete control of the SMSF and decides to pay the full balance of Virginia’s death benefit out to herself. There is nothing Peter can do legally to prevent this from occurring. Again, the terms of Virginia’s Will are entirely irrelevant.

How could these situations have been easily avoided?

Both Jill and Virginia should have considered the merits of putting a Binding Death Benefit Nomination (BDBN) in place.

A BDBN is a valuable tool that legally requires the trustee(s) of the SMSF to pay the death benefit according to the terms of the nomination. Care should be taken when preparing a BDBN that it matches the requirements of the superannuation law and the SMSF Trust Deed.

Both Jill and Virginia’s nominations could have directed the trustee of the SMSF to pay their death benefits to their estates to enable the death benefits to be distributed under the terms of their Wills. Alternatively, the nominations could have also directed the trustee(s) to pay the death benefits to the nominated beneficiaries directly, bypassing the estate and Will completely.

Why is the binding death benefit nomination such a critical estate planning tool?

  • It enables the remaining trustees to pay out superannuation death benefits straight away. This avoids the typical estate delays such as waiting for probate. This can assist the deceased families immediately in meeting funeral and other costs.
  • If there is any risk that the deceased estate could be subject to litigation (such as contesting the Will), a valid binding death benefit nomination can bypass the estate entirely and avoid the risk of litigation.
  • If the deceased was bankrupt or had significant creditors owing, a valid BDBN bypasses the estate and prevents creditors accessing the funds.  
  • If there is any risk that the remaining trustee(s) of your SMSF will not follow your wishes as to where you want your death benefit paid, a valid BDBN provides certainty and removes trustee discretion over how benefits are distributed.

There will, however, be situations where a BDBN is not the estate planning solution.

BDBNs (and any estate planning measures) are not ‘set and forget’ documents. Each family situation is unique, and family situations change often. Just as you would consider updating your Will as circumstances change, you need to consider reviewing how your superannuation is structured including BDBNs at the same time.

It is essential to ensure that your BDBN is prepared by an experienced professional who undertakes a review of your full family circumstances as well as reviews the superannuation trust deed, and, company constitution where relevant. We regularly see invalid nominations being prepared and the consequence is that the remaining trustees, once in receipt of an invalid nomination, have full discretion to disregard it and distribute the death benefits at their discretion.

Although the commentary above has focussed on SMSFs, similar measures can be implemented as part of estate planning for superannuation benefits held in other super fund structures. Binding death benefit nominations are just as critical when dealing with non-SMSFs and can ensure the member’s death benefits end up where intended.

Death benefits for members receiving a superannuation pension

If you are receiving a pension from your SMSF, you may have made a reversionary pension nomination at the time the pension started. This means that if you die the pension will continue to be paid to your nominated beneficiary. A reversionary pension works well if you would like your pension to carry on payments to your spouse or dependent children. However, if you would like your benefits paid to an adult child, to more than one person, or, to your estate (legal personal representative) you should ensure that your pension has not been established as a reversionary pension.

It is important to get advice from an experienced professional to ensure that your reversionary beneficiary nomination is valid and meets your personal objectives. Reversionary pensions are governed by the terms of your trust deed, and it is important to ensure the fund rules meet your individual requirements. Additionally, if your situation is complicated by multiple pensions or a remaining accumulation benefit it is important to ensure that it is appropriately documented which nomination relates to which pension, and that BDBNs and pension nominations are not in conflict. It is also essential to keep your estate planning arrangements up to date. If your circumstances change, for example, you get married, someone you have nominated dies or ceases to be dependent, your nomination may become invalid or need to be updated.

Tax planning on death and super:

Tax planning is an important consideration in the Estate Planning process but is not likely to be the sole objective. There are simple planning strategies that may be utilised to achieve your estate planning goals while minimising the impact of income tax on your beneficiaries or dependents.

Consider Clive, his objective is to have his superannuation benefit paid to his adult children on death; this would normally have some tax implications on payment. If Clive is suffering a terminal illness, he may benefit from seeking advice on the release of his superannuation benefits under a Terminal Illness condition of release. Subject to meeting the conditions of release, Clive could choose to withdraw his benefits and gift his money to his adult children before his death. This eliminates the tax that would have been payable if the same funds were paid to the adult children after his death.

Another strategy may be to employ a re-contribution strategy. This enables members to convert taxable balances within their funds to tax-free balances, so that upon death, the remaining funds can flow through to the estate and onto family members’ in a tax-free manner. However, with the Federal Budget’s proposed lifetime $500,000 cap on non-concessional contributions, if legislated, individuals will have fewer opportunities to utilise this strategy going forward.

Before undertaking any decision regarding your Estate Planning, Will or Superannuation Benefits we recommend that you talk to your BDO Adviser.