SMSF Strategy Guide: Online Library

Estate planning

SMSF Education
Smsf strategy guide: Online library

Estate planning in your SMSF

BACKGROUND

Estate planning is all about ensuring that a SMSF member has legal arrangements in place that will carry out their wishes in the event of their death. This involves the coordination of arrangements that take account of their home, their other assets, perhaps a business, life insurance, and their self managed super fund.

BINDING DEATH BENEFIT NOMINATION

Now a lot of this can be taken care of via your Will, however did you know that superannuation is what is known as a ‘non-estate’ asset. That is, SMSF benefits don’t just automatically become part of an estate and then dispersed via the Will.

Instead, what will happen is the remaining trustee(s) of a SMSF will:

  • firstly, look at the death provisions within the fund’s Trust Deed, and
  • secondly, look at what valid legally binding death benefit nomination the member has in place within the SMSF. They must then proceed with the member’s wishes as per that document, including what payments should be made to any dependents, or to thier estate.

So what happens if a member does not have a valid binding death benefit nomination in place. In that situation, the trustees may use their discretion to pay whatever they like to the member’s dependants, or they can pay the benefits to the member’s estate, or a combo of the two. Again, the trust deed may have some say in this, depending on how its drafted.

An often quoted case in regard to this is Katz’s case (Katz v Grossman [2005] NSWSC 934). In this case a SMSF member died. He had two adult children – a daughter who was also a trustee of the SMSF and a son who was neither a member nor trustee of the SMSF. The benefit amount was quite large, and the father had stated in his Will that all these assets were to be equally split between his two children.

What actually happened on his death was the remaining trustee – his daughter – paid the benefits to herself in their entirety. By doing so she was exercising her absolute discretion.

Why ? Because there was no legally binding death benefit nomination within the SMSF stating otherwise. Unfortunately for the son, the NSW Supreme Court upheld the action, and that in the absence of a valid BDBN, and as per the SMSF’s trust deed, the Will was not effective.

This is clearly not an outcome most trustees would want for their own fund.

For a binding death benefit nomination to be legally effective:

  • the beneficiaries must be the member’s legal personal representative (i.e goes to their estate and dispersed according to their Will) or it must be SIS dependants of the member.
  • all of the member’s benefit must be allocated. If the allocation does not add up to 100%, then the whole nomination can be invalid.
  • nominations are in writing, are signed and dated by the member in the presence of two witnesses. These witnesses must be at least 18 and must not be beneficiaries.

For large commercial super funds, a binding death benefit nomination will generally remain in effect for 3 years, however the ATO has determined for SMSFs this provision need not apply. Hence a trust deed that has been drafted with this mind can mean a BDBN can last indefinitely.

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