• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer

SuperGuide

Superannuation and retirement planning information

  • SuperGuide Premium
  • Account
  • Log In
  • SuperGuide Premium
  • Account
  • Log In
  • How super works
    • Super for beginners
    • Super rules
    • Employers guide to super
    • Super contributions
    • Super and tax
    • Accessing super
    • Super news
    • Women and super
    • Super tips and strategies
    • How-to guides
    • Super quizzes
    • Superannuation Q&As
    • Superannuation glossary
  • Super funds
    • Best performing super funds
    • Super fund rankings
    • Best performing pension funds
    • Pension fund rankings
    • Super fund average returns
    • Super investing strategies
    • Comparing super funds
    • Choosing a super fund
    • Choosing an investment option
    • Super fund fees
    • Insurance and super
    • Super fund profiles
  • SMSFs
    • SMSFs for beginners
    • SMSF administration
    • SMSF checklists
    • SMSF compliance
    • SMSF investing
    • SMSF pensions
    • SMSF strategies
    • SMSF Q&As
  • Plan your retirement
    • Retirement planning for beginners
    • When should I retire?
    • How long will I live?
    • How much super do I need?
    • Will I get the Age Pension?
    • How much will I spend in retirement?
    • Financial advice
    • Retiring overseas
    • Preparing for retirement
    • Retirement planning strategies
    • Retirement calculators and reckoners
  • In retirement
    • Income in retirement
    • Super lump sums
    • Super pensions
    • Age Pension
    • Working in retirement
    • Life in retirement
    • Senior concessions and services
    • Aged care
    • Estate planning
    • Super death benefits

Home / In retirement / Estate planning

Estate planning, super and SMSFs: Getting your house in order

February 11, 2019 by Luke Vanem Leave a Comment

Reading time: 6 minutes

On this page

  • Past learnings loom large
  • Control, update, be ready
  • Assets and death benefits: getting it right
  • Can trusts and SMSFs work together?
  • Blended families – is yours one of them?
  • Small APRA funds
  • Summary and moving forward

Estate planning is often overlooked or neglected by superannuation investors. A broad and complex topic, it can be made easier by breaking down the key elements.

This article won’t address all financial and legal issues in depth, especially for non-super assets. Instead, in the context of SMSFs, we will highlight some tricky areas, reinforce the need for proper planning and updating, and suggest strategies to manage certain situations.

Past learnings loom large

Superannuation is not automatically part of your personal estate, so from the outset decisions will need to be made as to what happens to it when you die.

It’s important to note that the provisions of the trust deed of the SMSF take precedence over any instructions given in a will. In other words, creating a will and automatically expecting it to be a binding authorisation of where super benefits are to be paid won’t work.

There are real-life examples of where SMSF trustees have ignored the deceased’s wishes in a will and re-directed the payment of super death benefits, such as the well-known Katz vs Grossman case in 2005. Such situations can leave children or spouses out in the cold, denied hundreds of thousands or even millions of dollars.

A will is still a critical part of any estate plan, but let’s first explore how to structure a SMSF in this context.


Advertisement
SuperGuide Premium is ad-free

Control, update, be ready

Who controls the SMSF on death is the bedrock for decisions on what happens to assets. Taking a step back, how is the control organised and structured to avoid emotional stress or disastrous court battles?

It starts with having an updated SMSF trust deed. Quality and currency matters with your trust deed, not just to meet legislative requirements but to benefit from innovations in the industry. New changes came in from 2017 and the number of trustees is also due to be increased from four to six from July 1, 2019. Careful selection of trustees is not taken lightly, from a trust and responsibility viewpoint.

The trust deed should reflect what you want to achieve – do you want to pay a lump sum of assets, or provide for an income stream? With many SMSF operators ageing, industry players suspect a critical point is nearing. One scenario involves two SMSF trustees, a husband and wife. If the more “active” trustee dies or becomes seriously ill with dementia, for example, the less active trustee may not be adequately prepared to make key decisions. An enduring power of attorney may be useful here.

Having a corporate trustee rather than an individual trustee arrangement can be favourable for estate planning – SMSFs with a corporate trustee can continue with a single corporate trustee if a trustee director of the two-person fund dies. Also, a sole purpose corporate trustee does remove the need to change ownership of every investment and account when a trustee dies.

Similarly, bespoke SMSF trust deeds can have clauses that limit death benefit distribution, control and beneficiaries. Again, if the trust deed is updated you will need to ensure these clauses remain or are still relevant. Decide what asset ownership structure works for you, and weigh up the time/costs involved under each arrangement.

Further to this, properly prepared change of trustee documentation is important in disputes that arise from divorce, or the death of a trustee/member. It helps avoid having the validity of the appointment of new trustees challenged. Similarly, your succession planning documentation which sets out any death benefit nominations or reversionary pension distributions needs to be complete, thorough and signed.

Compare super funds

Read more...

Advertisement

Assets and death benefits: getting it right

There are several ways to ensure the desired distribution of your super assets. Read our articles on Binding death benefit nominations (BDBNs) and reversionary pensions, which cover the major tax and financial implications.

It is critical that BDBNs remain consistent with the deceased’s intentions, as changing life, tax and relationship circumstances play a major role here. BDBNs are not always seen as entirely optimal for SMSFs, given the lack of flexibility for trustees to assess the current situation at time of death. One strategy may be to ensure a favoured beneficiary is left in control of the SMSF, and thus how the proceeds are managed.

Reversionary pensions can be suitable in an estate planning context – multiple pensions can be set up for different beneficiaries, protecting those who may be vulnerable. They automatically pass to a dependent upon the member’s death, providing certainty and minimising potential legal challenges. Having an existing pension continuing to be paid to your spouse upon your death is a simple and tax effective way of managing SMSF death benefits. Your spouse can commute (stop) the pension partially or in full if they want a lump sum.

A will is important where SMSF benefits are paid to the legal personal representative (LPR). Note that the LPR doesn’t automatically take the place of the deceased individual trustee – the trust deed must allow this. The LPR has major control over how death benefits are to be paid, but they still must abide by any binding death benefit nomination still in place.

In a worst-case scenario of being diagnosed with a terminal illness, you can access your super as a lump sum at any age and distribute to any persons of your choosing.

While we don’t discuss life insurance outside of super here, if you have this in place and are the policy owner, ensure that you have nominated a beneficiary otherwise the proceeds will be paid to your estate. Life insurance within your SMSF has tax advantages, but all payouts must now satisfy a condition of release, otherwise they may be held in the fund.

Advertisement

Can trusts and SMSFs work together?

Testamentary trusts are another option, where super funds become part of the estate under a will and can be directed to beneficiaries. They can be quite tax-effective, especially for minors. This can protect assets inherited by your children if their own relationship or marriage should break down.

Family trusts may also be an option, mainly as an intergenerational wealth transfer mechanism. It is not necessarily a case of family trusts vs SMSFs – both can complement each other. In a family trust, assets are owned by the trust rather than the individual. If one spouse dies or the $1.6 million super transfer balance cap is reached, trusts can act as a secondary investment vehicle.

Personal use assets such as holiday homes, as well as businesses, can be placed in family trusts. Family trusts can be established at any life stage to assist with wealth creation and continue upon death, keeping investments in place. Family trust deeds are also relatively simple to establish, and often require little amendment.

Blended families – is yours one of them?

With a high divorce rate and blended families more common, that raises new questions as to estate planning.

A husband and wife in their second marriage may both have children from their first marriage. Will makers, when they die, want to ensure their spouse receives estate benefits, but also that their own children benefit if their surviving spouse dies. A surviving spouse could change their will and leave everything in their estate to their own children.

One way to manage this risk is to have mutual wills. A mutual will is when each spouse agrees not to change their will if their spouse dies, and both agree on the beneficiaries of any assets – usually children of each spouse, including those from previous relationships. Changing circumstances also play a role here in testing the effectiveness of the agreement, especially if the surviving spouse is unfairly disadvantaged or cannot liquidate assets for any reason under the terms of the will.


Advertisement

For super death benefits, they can be received tax-free by a surviving spouse of the deceased member, but tax is payable if it goes to adult non-dependent children of the deceased member. Be careful in drawing up an agreement whereby a spouse who receives tax-free death benefits is obliged under the deed to give some or all these benefits to a non-dependant, as the ATO may well consider this a tax-avoidance scheme.

While death benefits can be payable to your step-children, after your death your children no longer qualify as the step-children of your former spouse and cannot be the beneficiary of their superannuation death benefits, unless they qualify as financial dependants or interdependent relations.

If you think your family is likely to dispute something if you die, you may consider creating a second SMSF so that each spouse has one. That separates the interests of both families and can give greater certainty for death benefit distribution – not to mention less likelihood of ending up in court.

Small APRA funds

Moving from a SMSF to a small APRA fund is not necessarily common or a recent trend. However, they can have benefits from an estate planning perspective, for blended families and for the elderly with diminished capacities or willingness to put in the time to run a SMSF.

A small APRA fund (SAF) is basically a self-managed super fund with a professional trustee. You won’t have the trustee responsibilities or risk of compliance oversights, and you get to maintain control of your investments.

It comes at a cost, of course, but you can set up an income stream for an intellectually-disabled relative, among other things. It might also be useful if you are moving or living overseas and thus are ineligible to be a SMSF trustee.

Summary and moving forward

One reason why estate planning is not black and white is that it relates solely to people’s lives, their changing circumstances, and in some cases, their eligibility for death benefits or even to take on the role of a trustee.

As a checklist, note the following to ensure your estate planning is in the best shape possible.

  • Check your trust deeds and have them updated when your circumstances, or those of family members, begin to change.
  • Select trustees carefully and recognise the time and costs involved in various structures.
  • Ensure your lawyer, accountant and other SMSF advisers prepare complete and signed documentation.
  • Be clear on your wealth generation objectives after you die – what type of income streams, under what asset structures, do you want for living beneficiaries?
  • Have a clear strategy for super and non-super assets.
  • Have a current will and adjust if necessary for changing family or other situations so that it properly reflects your wishes.
  • Ensure any death benefit nominations are properly structured and documented, taking tax and legal issues into account.
  • Consider complementary vehicles alongside SMSFs that may help with estate planning, such as trusts or other specialist retirement products or advice.
Want to understand the super and pension rules in retirement?

Become a SuperGuide Premium member and access independent expert commentary on important retirement rules, including taking a super lump or starting a super pension, working in retirement, the Age Pension rules, Commonwealth Seniors Health Card and the latest super rates and thresholds.

Includes performance rankings for 235 super funds and 166 pension funds, more than 500 articles, how-to guides, checklists, tips and strategies, calculators, case studies, quizzes and a monthly newsletter.

Find out more


Learn more about estate planning in the following SuperGuide articles:

Have you got an exit plan? The importance of estate planning

September 4, 2019

Multi-generational SMSFs: Benefits and pitfalls

September 1, 2019

Super strategies after losing your spouse: What are the rules?

September 1, 2019

Surely I don’t need a testamentary trust will (TTW)?

March 18, 2019

Learn more about SMSF administration in the following SuperGuide articles:

Your SMSF calendar

January 4, 2021

What you need to know about six member SMSFs

December 1, 2020

SMSF trustee housekeeping checklist for 2020/21

June 29, 2020

Guide to the ATO SMSF supervisory levy

June 1, 2020

The SMSF trustee declaration explained

June 1, 2020

Guide to SMSF trust deeds

June 1, 2020

SMSF annual admin checklist

April 22, 2020

Top 5 mistakes SMSF trustees make with their annual returns

April 22, 2020

Guide to SMSF administration, reporting and record-keeping

January 1, 2020

SMSFs: What advice can your accountant provide?

December 14, 2019

How to wind up an SMSF

December 4, 2019

How to record SMSF minutes

November 3, 2019

Guide to SMSF audits

June 14, 2019

Real DIY super: Ways that SMSFs can be ultra low-cost

May 2, 2019

Related topics

Estate planning In retirement

Related features

How-to Super Guides

IMPORTANT: All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs. You should consider whether any information on SuperGuide is appropriate to you before acting on it. If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Learn more

© Copyright SuperGuide 2009-21. Copyright for this article belongs to SuperGuide Pty Ltd, and cannot be reproduced without express and specific consent. Learn more

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

How super works
Super for beginners
Super rules
Employers guide to super
Super contributions
Super and tax
Accessing super
Super news
Women and super
Super tips and strategies
How-to guides
Super quizzes
Superannuation Q&As
Superannuation glossary
Super funds
Best performing super funds
Super fund rankings
Best performing pension funds
Pension fund rankings
Super fund average returns
Super investing strategies
Comparing super funds
Choosing a super fund
Choosing an investment option
Super fund fees
Insurance and super
Super fund profiles
SMSFs
SMSFs for beginners
SMSF administration
SMSF checklists
SMSF compliance
SMSF investing
SMSF pensions
SMSF strategies
SMSF Q&As
Plan your retirement
Retirement planning for beginners
When should I retire?
How long will I live?
How much super do I need?
Will I get the Age Pension?
How much will I spend in retirement?
Financial advice
Retiring overseas
Preparing for retirement
Retirement planning strategies
Retirement calculators and reckoners
In retirement
Income in retirement
Super lump sums
Super pensions
Age Pension
Working in retirement
Life in retirement
Senior concessions and services
Aged care
Estate planning
Super death benefits
Advertisement
Compare super funds

Join SuperGuide Premium and give your retirement plans a boost.

Get access to independent expert commentary on the latest super, retirement and SMSF issues, including the top performing super and pension funds, how much super is enough, the latest super rates and thresholds and new super measures and strategies.

You’ll have access to more than 500 articles, how-to super guides, checklists, tips, calculators, reckoners and other tools, as well as a monthly newsletter.

Find out more

Footer

Important: Disclaimer

All information on SuperGuide is general in nature only and does not take into account your personal objectives, financial situation or needs.

You should consider whether any information on SuperGuide is appropriate to you before acting on it.

If SuperGuide refers to a financial product you should obtain the relevant product disclosure statement (PDS) or seek personal financial advice before making any investment decisions.

Learn more

About SuperGuide

SuperGuide is Australia’s leading superannuation and retirement planning website. Learn more

Superguide Pty Ltd ATF Superguide Unit Trust as a Corporate Authorised Representative (CAR) is a Corporate Authorised Representative of Independent Financial Advisers Australia, AFSL 464629

  • Contact us
  • Advertise on SuperGuide
  • Careers

Before using this website

  • New to SuperGuide?
  • Terms and Conditions of Use
  • Financial Services Guide
  • Privacy Policy and Privacy Collection
  • Copyright Policy
  • Editorial Policy and Complaints
  • Disclaimer

  • SuperGuide Premium
  • Subscriber feedback
  • Sitemap