What happens to your SMSF when you die?

Print This Post A A A

The beauty of a family SMSF is that, if things have been set up right, the wealth can be transferred tax free to the spouse, the next generation and even the generation after that provided dependency can be established which, surprisingly for many, includes financial dependency.

Importantly, SMSF estate planning strategies cannot, under any other circumstances, be replicated through a will, testamentary trust or family trust. So let’s take a quick look at what you need to do to create an effective, compliant and secure SMSF estate plan, as the courts and the Commissioner of Taxation have ruled that binding death benefit nomination laws do not automatically apply to SMSFs, unless provided for in the trust deed!

1) Determine what’s important to you in the event of your death

This is the best question to get anyone started on the quest of developing a comprehensive, strong and effective estate plan in an SMSF. Another way of looking at it is: In terms of your SMSF, what’s important if you and your spouse had died together yesterday?

Write down the five or six most important things and then rank them. When developing any estate plan, attention should be paid to the most important things on the list. If you can get this right then you have a great framework to build a strong, robust and secure SMSF estate plan.

Many SMSF members are surprised to find that their will is completely ineffective when it comes to disposing of their superannuation benefits on their death. There was a well-publicised case in the NSW Supreme Court in 2005 – Katz v Grosman – where a father had left $1 million in the family SMSF. His will provided that all of his worldly possessions were to be passed to his son and daughter equally. Prior to his death, the father made his daughter a trustee and member of the family SMSF. The son had not yet become a member/trustee. As the only trustee of the fund and knowing that her father had not made a special binding SMSF estate plan, the daughter paid out the $1 million in benefits to herself, excluding her brother completely. The NSW Supreme Court deliberated on the case and held that she was in her rights as trustee to do that as it was allowed for in the fund’s trust deed.

The argument that the superannuation benefits were to be split equally in accordance with the will held no weight, as wills are based upon State law not Federal laws, which govern superannuation.

2) Get educated – some important SMSF estate planning rules

There are three basic rules to follow when creating your SMSF estate plan:

Who is going to control the fund on your death?

As we saw above, whoever controls the family SMSF on death controls the passing of a member’s benefits in most instances. For control, look to the trust deed. Unfortunately, 70% of SMSFs are deficient in the area of control.

Check your fund’s trust deed to see what happens on death and whether there is built in protection for a member’s interests by: firstly, handing out voting power according to the size of a member’s benefits in the fund; and secondly, by ensuring that a deceased member’s executor is automatically appointed as the deceased member’s replacement trustee of the fund to ensure that their wishes are effective. If not, then get your deed upgraded and certainly if you have not upgraded your trust deed since 2011, you and your family are exposed!

Switch to a special purpose SMSF corporate trustee

I still see too many SMSFs where the members of the fund are acting as individual trustees. This means that on the death of any member of the fund, the remaining trustees must contact all registry offices, land titles and other registries to notify them of a change in trustees. With a corporate trustee, which has an infinite shelf life just like the SMSF, the death of a member only requires a change in directorships, not a change in trustee. They are not expensive to run or maintain as all they do is look after the trusteeship of the SMSF.

However like the trust deed, the corporate trustee must ensure that the directors have voting power equal to their member superannuation benefits. Likewise the deceased member’s executor should automatically be appointed as a replacement director of the deceased member.

Certainty in passing of benefits

Unless a member of a fund has put in place an SMSF will – a set of directions and nominations to your trustees in waiting, dealing with the distribution of your super benefits upon your death, which contractually binds all current and future trustees, the remaining trustees of the fund can do whatever they like with a deceased member’s benefits.

The Commissioner of Taxation and the courts have emphatically stated that the laws on binding nominations do not apply to SMSFs, unless the trust deed says otherwise. Check your deed and see what it says, or importantly, get it reviewed or replaced by an expert.

3) Consult an SMSF estate planning expert

The key here is to employ a good SMSF coach – someone who will give you all the resources and tools for you to become educated on how your super benefits can and cannot be passed and, more importantly, help extract your desires and wishes and those of your family. It is not an expensive exercise but well worthwhile for long-term security and certainty.

* Grant Abbott is chairman of the Australian SMSF Members Association and director of SMSF Strategies. You can watch a YouTube video on estate planning here.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition

View More Articles