While keeping your self-managed super fund (SMSF) and its investments on track is essential, have you thought about what will happen to them when you reach the end of the line? If there’s no clear plan in place for when you’re no longer around, the fund’s carefully accumulated assets could end up with the wrong person, eroded by unnecessary tax, or sold off by the remaining trustees.
Over 1.1 million Australians held $885 billion in assets in an SMSF in September 2023, so it’s not a small amount of money or only a few people who need to think carefully about their SMSF estate plan.
Planning what will happen to your fund, who will run it and how your retirement savings are to be distributed if you die are all issues that need to be reviewed and fully documented.
There can also be valuable benefits for your beneficiaries if you have a good SMSF estate plan in place, so it’s worth taking the time to think things through carefully.
What is estate planning?
Estate planning is the process of organising your financial affairs so your wealth is efficiently distributed to your chosen beneficiaries after your death.
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Learn the essential facts about the SMSF investment rules, how to create an investment strategy (including templates) and how to give your strategy a healthcheck.
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A good estate plan helps minimise the tax your family and other beneficiaries pay when receiving your assets. It also helps ensure your wishes are carried out as intended.
Importantly, it’s not set and forget. A good estate plan requires regular reviews as your personal circumstances or those of your family change. It also requires regularly checking your beneficiaries remain eligible to receive your super death benefits.
Issues to consider in SMSF estate planning
Some estate planning issues are common to SMSF trustees and members of public offer funds, but some issues are peculiar to SMSFs.
Your Will and your super benefit
Many people believe once they have a Will in place, the future distribution of their super death benefit is fully organised. What they don’t realise is super is not automatically part of your personal estate, even if you hold it in a self-managed fund.
That’s because super is held in a trust on your behalf and not owned directly in your name.
The SMSF trustee(s) decide who receives your death benefits when you die. You cannot direct the trustee to pay a specific person through your Will.
Tax and your death benefits
Under super law, there are limits on the beneficiaries who can receive your death benefit and whether they can receive it as a lump sum or an income stream.
Although your SMSF can pay your super death benefit to both your dependants and non-dependants, the tax implications for the beneficiaries will depend on their status under tax law.
How the beneficiary receives the benefit may also impact whether or not the fund will need to be wound up. If the beneficiary receives the death benefit as a pension, the fund’s investment portfolio can remain intact and the fund may not need to be wound up. In other cases, the fund may need to be wound up and potentially rolled into another super fund.
If the SMSF trust deed permits it, the death benefit may also be paid in-specie, so non-cash assets (such as a property) can be transferred directly to a beneficiary.
Control of your SMSF
The trustees who are in control of your SMSF when you die have a major impact on what happens to your super benefit and the fund’s assets. As your super doesn’t form part of your estate, the trustees are free to make whatever decisions they believe are in the best interests of the fund. For example, the trustees may decide to sell assets – such as a family business or property – you wished to retain within your SMSF.
There have been a number of legal cases where SMSF trustees ignored a deceased member’s wishes and redirected the payment of the member’s super death benefits, resulting in the chosen beneficiaries (such as children and spouses) missing out on substantial amounts.
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Your SMSF trust deed
An up-to-date SMSF trust deed is essential for a successful estate plan. The trust deed needs to be regularly revised to cope with all recent and forthcoming legislative changes.
A good trust deed should give trustees the power to achieve your estate planning goals, such the ability to pay an income stream to your beneficiaries. Creating a bespoke trust deed can allow you to include clauses limiting death benefit distributions, control and beneficiaries.
Death benefits and your SMSF
To ensure your estate plans are carried out in full, you must have a binding death benefit nomination (BDBN) as well as a Will in place. Without a BDBN, the trustee(s) of your SMSF have the discretion to pay your death benefits to an estate or directly to your spouse, child or other financial dependent.
Needless to say, clear and up-to-date documentation is vital to ensuring your estate plans are carried out in full. So check all members of your SMSF have completed a BDBN and the nominations are signed, witnessed and stored with other key fund documents.
BDBNs must be valid and executed as required in the fund’s trust deed to make a nomination effective.
View our webinar on death benefit nominations.
Reversionary pensions
Nominating a reversionary beneficiary for your super benefit can be a useful tool for estate planning, especially for couples wanting to ensure their spouse continues to receive their super pension when they die. With a reversionary pension, your beneficiary automatically becomes entitled to receive your super pension.
Provided your intended beneficiary is an eligible death benefit dependant at the time of your death, your pension continues to be paid and simply ‘reverts’ to them. This provides certainty and minimises the potential for legal challenges. Beneficiaries can commute or stop a reversionary pension in part or full if they prefer a lump sum.
Reversionary pensions can be set up to provide income streams for multiple beneficiaries, which is useful if you need to protect vulnerable or under-age recipients.
Enduring power of attorney (EPOA)
Every trustee of an SMSF should have an EPOA in place in case of death or serious illness. This is particularly important for small SMSFs because if the ‘active’ trustee dies or becomes seriously ill (or suffers dementia), the less active trustee may not feel capable of making the necessary decisions for the fund. Having a professional adviser named as an EPOA can be essential in these situations.
Corporate trustees and small APRA funds
Having a corporate trustee rather than an individual trustee arrangement in place in your SMSF can also be useful for estate planning purposes.
A SMSF with a corporate trustee is able to continue operating after one member in a two-member fund dies, as the fund still meets the definition of an SMSF. Using a sole purpose corporate trustee also removes the need to change ownership of every investment asset and account when a trustee dies.
SMSFs with an individual trustee structure require a minimum of two trustees. This means you will need to have a succession plan in place to continue operating after the death of a member/trustee.
Moving from an SMSF to a small APRA fund may also be worth considering in some situations. This structure can be helpful if you have a blended family or the SMSF has older trustees with diminished capacity or willingness to put in the necessary time to run the SMSF.
Additional SMSFs
Creating a second SMSF for your spouse can be beneficial if you think your family may challenge your estate plans when you die. Having two SMSFs separates the financial interests of your children and your spouse, which can provide greater certainty about distribution of your super death benefits.
Trusts
Testamentary and family trusts can also be established to complement your SMSF. These estate planning structures can be tax effective when managing intergenerational wealth transfers, particularly to minors.
They are also a useful secondary investment vehicle if you have reached the current general transfer balance cap of $1.9 million (from 1 July 2023.) (It’s important to note your personal TBC may be different from the general cap. Your personal TBC will depend on your recent level of contributions.)
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