SMSFs must get binding nominations right
New laws that have changed the nature of the super system mean many self-managed super fund (SMSF) members need to ensure the death nominations related to their fund are still appropriate.
While the new rules may change how you direct your nominations, it’s also an opportune time to ensure your nominations still reflect your wishes.
It is important to know superannuation is not necessarily directed via your will when you die. You must leave valid death benefit instructions direct to a super dependant or to your estate.
A super dependant is broadly defined as your spouse, child and financial dependants or interdependents, which are two or more people who are dependent on each other.
“These super dependants are taxed differently and can receive your superannuation differently. But a simple way of thinking about it is that your spouse and children under 18 and financial dependants and interdependents can receive your superannuation benefit tax free,” says Rhiannon Kanoniuk, director and practice principal of financial advice firm Pekada.
They also have a choice to take the benefit as a lump sum or an income stream.
Says Kanoniuk: “A child over 18 who is not financially dependant may incur tax on receiving the death benefit, and also does not have the choice of taking it as an income stream.”
She explains if you have not left a valid nomination when you die, your fund’s trustee has discretion to pay out the fund’s proceeds in line with the trust deed’s rules – which may or may not be in line with your wishes.
“When making a choice about where to direct your super when you die, first consider who you would like the recipient of the funds to be and if they meet the definition of a super dependant,” says Kanoniuk.
If they do, you may decide to place a binding nomination on your fund to pay this directly to them. Or, in the case of starting a superannuation income stream, you may elect to have this automatically revert to them, if allowed.
“If they do not meet the definition of a super dependant, it is still very important to place a nomination on the fund to ensure the trustees pay your benefit to your estate and then use your will to direct these funds,” she adds.
Once you’ve made your choice, consider the tax consequences if you have decided to pay your super to your adult children or non-super dependants, particularly if there are insurance benefits involved within the fund.
Damian Liddell, a financial adviser with Browell’s Financial Solutions, says the main mistake people make around their death nominations is making a binding nomination to someone who doesn’t meet the legal definition of a dependent.
“If this isn’t picked up until after someone dies, the nomination ends up becoming invalid,” he says.
According to Liddell, another mistake is people making a binding nomination when they don’t have a complex family situation.
“In this case they may have been better off making a non-binding nomination. This gives the trustees some discretion. For instance the nominated beneficiaries may request a change to the nomination to optimise their position from a tax-planning perspective,” he explains.
Super changes may impact nominations
SMSF trustees need to be aware death benefit nominations may need to change as a result of new super rules, in particular the $1.6 million pension transfer cap.
“If the combined value of the dependant’s pension account and the reversionary death benefit pension account exceeds $1.6 million, then the dependant can reduce either of the pensions and pay the excess as a lump sum benefit,” Liddell explains.
If the deceased’s superannuation has to be reduced or commuted back to the accumulation phase, then it cannot remain in the dependant’s accumulation account. It must be paid out otherwise it will contravene the regulatory requirement to cash the death benefit as soon as practicable.
“If the dependant’s pension account has already reached $1.6 million, then the dependant cannot receive a reversionary death benefit pension without reducing their pension account to below $1.6 million,” he adds.
The message for SMSF members is to check their nominations now to ensure they are still appropriate when the new rules fully come into force on 1 July.
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