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Estate planning and SMSFs part 1: when and how to plan

An SMSF member’s retirement and pension commencement is often an opportunity to review estate planning around the fund.



Estate planning for self-managed super funds (SMSF) can be complex, so it’s important to take time to consider the outcomes members want when they die, taking into account the considerable legal restrictions that apply to super and estate planning. 

This is the first in a two-part series that explores issues SMSF trustees should address when managing estate planning around a fund. In this article we explore how proactive financial planning can ensure the right outcome for members and their beneficiaries.

“First and foremost is to understand what the trust deed allows when it comes to estate planning,” says AMP Financial Planning adviser Damian Hearn. 

“Just because something isn’t specifically prevented in the deed doesn't mean you can do it. Trustees need to consult their deed when they complete their estate plans. Most importantly, as with all super, it's important to recognise it doesn't form part of your estate. So having a game plan when it comes to your superannuation and how it fits in your overall estate plan is extremely important,” he adds.

Estate planning can necessitate an update of the fund’s trust deed, which may include putting in specific clauses or even a living Will within the SMSF. The living Will should give comprehensive instructions to the remaining trustees as to what should happen on a member’s death. 

“It can be as simple as indicating all your superannuation should go to your spouse. Or it can be more complicated, and the deed might include a number of instructions as to what should happen after a member’s death which are consistent with the superannuation law,” Hearn adds.

Turning point


“When you start your pension you can decide to continue the pension on the member’s death to their spouse via a reversionary beneficiary. That's a significant planning point,” Hearn explains.

It’s also essential to have an enduring power of attorney in case one or more members can no longer make legal decisions.

When it comes to death benefit nominations, it’s essential to be clear about who a superannuation dependent is under law. A superannuation dependent can be a spouse, including de facto and same sex, and a child of any age. 

“Relatives like a brother or sister who are not financially dependent on the member are not considered to be superannuation dependents,” Hearn explain.

“So have a good understanding as to who a super dependent is, because if you put together a binding nomination and nominate somebody who is not a super dependent, the nomination will fail,” he adds.

In that situation, how the funds are paid and to whom is at the trustee’s discretion. The risk is if nominations are not correctly made, the funds could go to someone the member never intended to receive them.

Tax time


There are considerable potential tax consequences for beneficiaries receiving funds from an SMSF.

A child who is an adult and financially independent will not generally receive a payment from their parents’ SMSF tax-free on their death. In this situation, distributions from the fund are taxed at 15%, plus the Medicare levy.

Depending on the circumstances, in the estate planning process some benefits can be directed to certain beneficiaries to minimise their tax.

“Clients can make a personal after-tax contribution to super and, depending how the planning is done, it can be earmarked for an adult who is non-financially dependent on the member. Pre-planning and seeking advice is essential, but the result is that when the money is passed onto the adult child, you're passing on personal after-tax contributions that are paid out tax free,” Hearn explains.

“If you put your superannuation into the estate, you need to have very clear goals as to how the money will be distributed via your Will,” he adds.

If your intention is for, say, your brother or sister to receive your superannuation, an option is to make a binding nomination to your estate that directs the super to it. Within your Will you would stipulate that any superannuation proceeds received will go to your brother or sister. 

Your planning must involve a qualified solicitor who is an estate planning specialist with considerable SMSF experience.

Binding nominations are legally binding for the trustee. Additionally, the nomination has to be witnessed by two people who are over 18 and who are not beneficiaries noted on the binding nomination. So if your spouse is a beneficiary to receive your super, he or she can't witness the binding nomination. 

Binding nominations must also comply with super rules and need to be renewed every three years. There are other considerations with non-lapsing binding nominations that don’t lapse after the three-year period. For instance, it is advisable to have the deed updated, otherwise an aggrieved beneficiary could challenge this via the court system rendering the non-lapsing binding nomination invalid.   

“If the binding nomination does not comply with the rules, for instance the nomination was not properly witnessed, the court could rule that, rather than being valid, trustee discretion will apply.,” Hearn stated. 

In the next part of this two-part series we look at how to avoid common mistakes trustees make around SMSFs when estate planning.
 
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