SMSFs and estate planning: An introduction

On this page

Introduction
The three key areas of estate planning for SMSFs
The member level
The trustee level
The fund level
Wrap up

In this newsletter we include the first article in a four-part SMSF and Estate Planning series, designed to highlight and explain the key issues relevant to estate planning within a self-managed super fund (SMSF).

We will cover each of these issues from three perspectives: issues specific to SMSF members, trustees and the fund itself.

This first article will provide you with an introduction and overview of the key SMSF estate planning issues and opportunities, which we will then look at in more detail over the coming months.

Introduction

A key feature of an SMSF is the ability for members to have a greater level of control over the payments made from their super fund after their death.

Carried out correctly, the outcomes for your loved ones can be extremely beneficial. Not only from a tax perspective, but also for asset protection and for an effective transfer of wealth.

You are probably aware of the importance of having a valid and current Will that sets out your wishes for the distribution of your non-superannuation assets on your death. Less well understood is that your retirement savings held in super, which can be substantial, are not automatically dealt with through your Will.

So it is extremely important that you put in place the required documentation and fund specific paperwork to achieve the desired outcome for your super balance.

As we don’t know how long we’ll live, this task should be seen to when you establish your SMSF and reviewed whenever your financial or family circumstances change.

Another important issue relating to estate planning for SMSF trustees is the need to consider your mental capacity and the outcomes that may result when that capacity diminishes as you age. There are a number of important steps that may need to be followed should this occur.

The three key areas of estate planning for SMSFs

How death benefits are paid and to whom would usually be considered a “member level” issue or decision and is probably the thing most often spoken about when discussing estate planning in an SMSF.

However, as a member of an SMSF, you also need to consider the issues relevant for the fund’s surviving trustees and for the SMSF itself.

We have set out below a summary of the issues that need to be considered at each of these three levels.

The member level

These are the issues that each and every SMSF member needs to consider:

Should you have in place a death benefit nomination? Should this be binding or non-binding? Should the nomination be non-lapsing?
Should you have a reversionary nomination (typically to your surviving spouse) attached to an existing pension? Or should this pension simply revert to accumulation phase on your death?
Who should you nominate as the beneficiary or beneficiaries of your superannuation benefits?
What tax, if any, will need to be paid based on who that beneficiary is and in what form they receive the death benefit payment?
If you have a corporate trustee for your SMSF, who are you going to leave the shares in that company to?
Do you understand the rules around both “tax dependants” and “super dependants” as these differ significantly?
Have you considered the current and ongoing transfer balance cap position of the nominated beneficiary. Will the nominated beneficiary be able to keep these death benefits within the super environment or will they need to cash out these benefits?
Should you consider carrying out a recontribution strategy over the years to reduce any tax that may be payable by your non-tax dependants on your death?

You can read more about the recontribution strategy.

These and other key estate planning issues relevant at the member level are covered in detail in Part 2 of the Estate Planning series.

The trustee level

These are the issues that the surviving SMSF trustees need to consider when dealing with the death of an SMSF member:

Is the SMSF in a position to finalise the death benefit payments from the SMSF within the required time frames?
Does the SMSF have the required liquidity to make these payments?
Does the SMSF have sufficient diversification that will allow benefits to be paid out? Or are the member’s benefits tied up in indivisible assets like property?
What does the trust deed allow around the payment of death benefits?
In what form can death benefits be paid? Pension, lump sums, in-specie transfer of assets?
Does the trust deed allow the death benefit to be paid in accordance with the member’s current death benefit nomination or will you need to pay these benefits in another manner?
Ensure that the SMSF rules and requirements actually allow for the member’s wishes to be carried out.

We will be looking at the key estate planning issues relevant at the SMSF trustee level in Part 3 of the Estate Planning series.

We will also look at the issues around trustee capacity and when it may be time to have someone else carry out your SMSF trustee duties for you.

The fund level

We have set out below the issues that are specific to the SMSF itself. Where these issues are not addressed appropriately, you may find that the SMSF needs to be wound up; either by choice or under direction by the regulator!

Do you need to appoint a new person to act as a trustee of the SMSF in place of the deceased member or appoint a new person to act as a director of the SMSF corporate trustee? If the correct process is not followed and within the required time frame, the SMSF may fail to meet its ongoing compliance requirements.
Consideration needs to be given to any tax outcomes that may arise at the fund level, for instance capital gains tax if assets need to be sold.
There may also be pay-as-you-go withholding (PAYG) tax issues to consider.
Were there any insurance policies held for the recently deceased member? If so, how will the insurance proceeds be distributed?
Should the remaining trustees claim a tax deduction for any current year insurance premiums on these policies, or should they consider claiming a much larger tax deduction under the “future service period” deduction rules?
Have you considered the eligibility for the SMSF to continue to claim exempt current pension income (ECPI)? If so, make sure that all necessary processes have been followed so that this tax concession can continue.
Should the SMSF continue to operate or is now the right time to wind up the fund?

Part 4 in this Estate Planning series covers these key estate planning issues and many others relevant at the SMSF fund level.

Wrap up

As you can see, there is a lot more to SMSF estate planning than simply nominating a beneficiary and completing the required forms.

Dealing with these issues appropriately will usually result in far better outcomes for both your beneficiaries and the ongoing survival of your fund.

We look forward to taking you through these issues in detail in the remaining articles in this series. Members can also view our Estate Planning webinar.

Next: Read part 2 of this series – what fund members should consider and plan for.

The information contained in this article is general in nature.