Wills and SMSF Estate Planning

Wills and SMSF Estate Planning

SMSFs are the investment vehicle of choice for a huge number of Australians – which is no surprise considering the control and flexibility they offer.  Although most of us ensure we have valid death benefit nominations in place covering our superannuation monies, we need to ensure these nominations are also integrated with our personal Wills to form an overall estate plan.

Your personal Will does not govern your SMSF benefits

The payment of benefits from a SMSF, including benefits paid upon the death of a member, is covered by the rules contained in the SMSF trust deed – not the Will of the deceased member.  This was confirmed by the ATO in determination SMSFD 2008/3.

Your Will however is still critically important when putting together your estate plan for a couple of reasons:

  1. Where SMSF benefits are paid to the legal personal representative, they then become part of the estate of the deceased member to be distributed with their other assets.
  2. The Will determines who becomes the executor of the deceased individual’s estate (i.e. the legal personal representative).

The legal personal representative generally will step into the place of deceased individual trustee (or director of the trustee company) – however this does not happen automatically on death of the member as most people (including accountants and advisers) believe. The legal personal representative still needs to be appointed as per the rules contained within SMSF trust deed.

The legal personal representative has significant control over how death benefits within a SMSF are paid – however they still have to comply with any valid (unexpired) binding death benefit nominations that are in place.

Equalisation Clauses

A well drafted trust deed can contain an equalisation clause (also known as a ‘hotchpotch’ clause).  These clauses take into consideration benefits received directly from a SMSF when distributing the residual assets from an estate.

For example if an individual passed away with $1 million in a SMSF and $1.6 million in other assets outside of super (total asset pool of $2.6m) and that individual wanted all their assets split evenly between their spouse and adult child upon their death, the executors could have the spouse receive only $300k from the estate plus $1 million from the SMSF.  The remaining assets of the estate ($1.3 million) could then be distributed to adult child.

This flexibility is also significantly more tax effective as a financial dependent such as a spouse can receive death benefits from a SMSF entirely tax free, whereas a non-financial dependent adult child would lose 16.5% tax on the taxable component of the deceased members benefit within the SMSF.
 

Formula for a solid SMSF estate plan

  • Ensure all members have a well drafted and up to date personal Will and Powers of Attorney
  • Look at a re-contribution strategy to wipe out as much of the taxable component within the members benefit as possible
    • This is ideally done between the ages of 60 and 65
    • Having a low taxable component reduces or eliminates tax when death benefits are paid to a non-financial dependent such as an adult child
  • Utilise a good quality and up to date SMSF trust deed
  • Any trust deeds dated prior to 2007 should be updated to take into account significant changes
  • Make use of a special purpose trustee company for your SMSF
    • This enables the SMSF to continue to operate upon the death of a member
    • A corporate trustee means all the investments do not need to be changed to the name of the new trustees upon the death of one member
    • Take control now and save significant headaches at a time where mountains of paperwork will be the last thing your spouse will want to deal with
    • Only ongoing cost is an annual $43 fee to keep the company registered
  •  Make your pensions automatically reversionary to your spouse
    • Having an existing pension continuing to be paid to your spouse upon your death is the cleanest and most tax effective way of managing your SMSF benefits
    • The receiving spouse will generally have the option to commute or stop the pension partially or in full if they want a lump sum
    • The automatic reversion of a pension is not considered a superannuation death benefit and actually comes before or overrides any binding death benefit nominations that are in place
    • A pension, and thus the tax exemption on the income within the SMSF, stops when that pension member dies.  An automatic reversionary pension ensures that there is no unnecessary addition tax paid by the SMSF.

Summary

Unfortunately not all lawyers have expert super knowledge, and even fewer have adequate SMSF knowledge.  Likewise, your accountant or adviser cannot put together an estate plan for your SMSF in isolation – it needs to be completed as part of an overall estate plan covering both super and non-super assets.

 

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