In this guide
When it comes to their retirement savings, there are a number of estate planning issues and opportunities that SMSF members need to consider.
In this article, we will look at these opportunities and what you can do to get the best possible outcomes for both you and your beneficiaries.
Death benefit nominations
The trust deed of most SMSFs will allow fund members to nominate an intended recipient of their death benefits. This requires certain paperwork, referred to as death benefit nomination forms, to be completed, signed and witnessed.
It is also important to note that only certain people can be nominated as a death benefit recipient, referred to as your ‘superannuation dependents’.
These include:
Free eBook
SMSF investing essentials
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.
"*" indicates required fields
- A spouse, including de-facto arrangements
- A child
- Interdependents: Someone who you have a close personal relationship with, and either one or each of you provides the other with financial support, domestic support and personal care.
- A financial dependent.
If you are looking for your super benefits to pass to someone not listed above, that is, to a non-superannuation dependent, then you may need to nominate your legal personal representative so these benefits can then be dealt with through your Will. Your legal personal representative may also be referred to as your executor or as the trustee of your deceased estate.
Where a member fails to put in place a valid death benefit nomination, the remaining SMSF trustees will make the final decision about who will receive your death benefit. They may decide to pay your benefits to your estate where your member balance will form part of the overall estate assets.
Alternatively, they may choose to pay the death benefit to one or more of your eligible beneficiaries. The key issue here is that there is no certainty of the outcome.
Where you are looking for a particular outcome, then you should consider using a death benefit nomination.
Types of death benefit nominations
There are different types of death benefit nominations that can be used and you will need to check your fund’s trust deed for any specific rules or restrictions that may apply.
Non-binding death benefit nomination
These nominations allow the fund member to suggest who should receive their super benefits on their death. As the title suggests, the remaining trustees are not bound by your request and they have the final say. They could decide to pay the benefits to someone else if they deem it appropriate.
Your SMSF Trust Deed may have specific requirements on how often these nominations need to be revisited in order to remain valid.
These nominations provide the flexibility to pay the deceased member’s benefits to the right person at the appropriate time. But as they are non-binding, their use can result in unintended outcomes.
Binding death benefit nomination
These nominations allow the fund member to nominate the intended beneficiary of their super benefits on their death. Where the nomination is valid, the remaining fund trustees are ‘bound’ to carry out these wishes.
Once again, your SMSF trust deed may have specific requirements as to how often these nominations need to be revisited to remain valid. Some funds require this every three years, so it is extremely important that you review these nominations regularly for appropriateness and validity.
You should also consider any possible changes to the tax status of any nominated recipient over time. For instance, where a child turns 18 and may then be subject to tax on parts of the death benefit payment. We will look at the tax issues shortly.
Non-lapsing death benefit nomination
These nominations allow the fund member to nominate the intended beneficiary of their super benefits on their death. Provided the nomination is valid, the trustees are ‘bound’ to carry out these wishes.
Super knowledge is a super power
"*" indicates required fields
As the name suggests, these nominations remain in place until they are amended or updated.
Check your SMSF trust deed to see if the deed allows this form of nomination. Once again, you must review these nominations regularly for appropriateness and validity and also consider any possible change to the tax status of the nominated recipient over time.
Taxation considerations
Earlier in this article, we looked at superannuation dependents; those eligible to receive a death benefit payment direct from a super fund.
It would also be prudent to look at taxation dependents – those that receive some form of tax concession on the super death benefits they receive.
Tax dependents include:
- A spouse or former spouse
- A child under the age of 18
- A financial dependent
- An interdependent
How a super death benefit is paid will affect the tax that may be payable. For instance, the following table shows the tax treatment of a death benefit when paid as a lump sum:
| Lump sum | Tax-free component | Taxable component |
|---|---|---|
| Paid to a dependent | Paid out tax free | Paid out tax free |
| Paid to a non-dependent | Paid out tax free | Taxed element: Max. 15% plus Medicare Untaxed element: Max. 30% plus Medicare |
If a member’s death benefit is paid as a pension instead, then the following table shows the tax treatment:
| Ages | Component | Tax outcome |
|---|---|---|
| The deceased member or the death benefit recipient are 60 or older | Tax-free component | No tax |
| Taxable (taxed element) | No tax | |
| Taxable (untaxed) | Marginal rate less 10% offset | |
| The deceased member and the death benefit recipient are both under 60 | Tax-free component | No tax |
| Taxable (taxed element) | Marginal rate less 15% offset | |
| Taxable (untaxed) | Marginal rate no offset |
Keep in mind that a death benefit pension can only ever be paid to a dependent.
Transfer balance cap considerations
When considering who we are going to leave our super death benefits to, we need to take into account the expected transfer balance cap (TBC) position of that nominated beneficiary.
The TBC is a limit on super balances that can be held in the tax-free retirement phase of super.
Member balances that exceed the TBC and hence cannot be held in retirement phase, will need to be held in an accumulation account where the earnings are taxed inside the fund at the rate of 15%.
However, there are other specific rules regarding death benefits from super that require all death benefits to be cashed out from the super system.
The term ‘cashed out’ or ‘cashing’ refers to the payment of these death benefits by way of a death benefit lump sum or pension. This means that no part of a deceased member’s death benefit can remain within the accumulation account of the beneficiary.
For this reason, the intended death benefit recipient’s own TBC needs to be taken into consideration. If you were to leave your death benefits to a beneficiary who has already used up their TBC, then these death benefit amounts would usually need to be cashed out from the super system or your beneficiary may be forced to move part or all of their own benefits back into the accumulation phase.
Reversionary nominations
Another key estate planning issue relates to the starting date of pensions.
When you commence a pension from your fund, you can identify another person who will automatically continue to receive your pension payments after you die. This person is referred to as your ‘reversionary beneficiary’ and you can only nominate your spouse or a child under 18.
As the transfer of the pension automatically occurs on the death of the member/trustee who made the reversionary nomination, the remaining trustees have no real say in the payment of your death benefits. It creates certainty for the deceased member and their chosen reversionary beneficiary and removes any trustee discretion.
If you are considering nominating a reversionary beneficiary, then:
Supercharge your SMSF
"*" indicates required fields
- Make sure all requirements under your trust deed for reversionary pensions have been met, especially around the pension application process.
- Make sure the SMSF assets can continue to fund the pension payments following the initial death of a member, that is, pay attention to issues of liquidity and cash.
Control of the SMSF after you die
SMSF members need to consider what will happen to their SMSF when they die. In our third article in this series, we will focus on these key SMSF trustee issues.
As an SMSF member, you have some control over who will take your place as the SMSF trustee or director on your death. This is more of an issue for people who are members of an SMSF with non-family members, for instance, business associates.
It may be possible for you to pass control to the most appropriate person by including one or more of the following:
- Have in place an alternate director nomination. This person can then be appointed as a director of the SMSF corporate trustee immediately.
- Consider who you are going to leave your shareholding in the corporate trustee, noting that shareholders can vote in and vote out the directors.
The bottom line
In a perfect world, there would be no need to consider the issues that may arise on the death of an SMSF member. Unfortunately, we don’t live in such a world.
Planning ahead and putting in place the appropriate paperwork will result in your wishes being seen to and will, in most cases, reduce the risk of family bickering.
In the next article in this series we will look at some of the key SMSF trustee issues that need to be considered on the death of a fund member.
Don’t forget that SuperGuide members can view our estate planning webinar.
The information contained in this article is general in nature.
Leave a Reply
You must be logged in to post a comment.