Superannuation is a major asset for most Australians, often being the largest asset held aside from the family home.
Undertaking effective estate planning around your superannuation is therefore crucial to ensure not only that your member balance is distributed in accordance with your wishes, but also that this is done in the most tax-effective manner, and in a way that minimises the burden which is placed on your surviving family members.
Some important considerations when undertaking estate planning for your fund are as follows:
Binding Death Benefit Nominations
Superannuation is an asset which is excluded from your will, unless documentation has been put into place within the fund to direct your balance to your estate. In the absence of this, any benefit payable is distributed by the fund’s trustee in accordance with the trust deed. As a general rule, the deed will give the trustee discretion to pay the benefit to one or more of the member’s dependants, or to the estate for distribution in accordance with the will.
Over the last few years various cases have emerged which demonstrate the importance of effective estate planning to ensure that the trustee does not use this discretion to their personal advantage.
One specific example is the case of Katz v Grossman. In this instance, a father (Ervin) appointed his daughter to act as the second trustee of his SMSF. Ervin nominated in his will that his $1 million in superannuation be distributed equally between his daughter and his son, however did not have a binding death benefit nomination in place within the fund.
Upon Ervin’s death, his daughter appointed her husband to act as the second trustee within the fund. Together, the trustees resolved to pay Ervin’s entire death benefit to his daughter, and disregard Ervin’s indication that he wished for the benefit to be distributed equally. Ervin’s son challenged this matter, however, the NSW Federal Court held that the trustee had discretion as to whom the benefit was paid under the fund’s deed, and that the will was not effective with regard to Ervin’s Superannuation balance.
A trustee’s discretion as to how a member’s superannuation benefit is to be paid upon their death can be removed by putting a Binding Death Benefit Nomination (BDBN) in place. The ability to make this nomination must be permitted by the fund’s deed, and the document must be in the prescribed format to be legally valid.
The advantages of a BDBN are as follows:
- If there is concern that the person making the benefit payment will not follow the wishes of the member.
- If there is a concern that the member’s Will may be challenged, as a BDBN requiring payment direct to an individual will have the effect of keeping the member’s superannuation balance outside of their estate.
There are however some disadvantages to having a BDBN in place, as they do not allow the trustee any flexibility in the payment of the benefit. For example:
- It may be more effective to pay a death benefit to a testamentary trust held for the benefit of an individual. However, if the BDBN has been made to an individual the benefit must be paid directly to that person.
- The nomination may be for payment to be made to the member’s estate, where it has become apparent that a challenge is probable.
Under the legislation, BDBNs made to retail superannuation funds are required to expire after 3 years, however, those made for self managed superannuation funds can be made so that they are non-lapsing BDBNs, which will last indefinitely. The members’ ability to make a non-lapsing BDBN is governed by the fund’s deed, which should be reviewed to ensure that the BDBN is valid for the appropriate timeframe for that member’s situation.
Enduring Power of Attorney
An Enduring Power of Attorney (EPoA) allows a member to appoint somebody to make decisions on their behalf. This can be beneficial to that member in a number of scenarios, including:
- The member goes overseas for an indefinite amount of time.
- The member is temporarily unwell.
- The member has become incapacitated.
Under the the Superannuation Industry (Supervision) Act 1993 (SIS Act), a member must also be a trustee of the fund (or director of the corporate trustee). If the member loses capacity, they are no longer permitted to act as a trustee or director. Ordinarily, this would mean that they could no longer be a member of the fund, however, if that member has an EPoA in place their attorney is authorised to act as trustee or director on that member’s behalf.
This would permit the member to remain within the fund, thus eliminating any need to liquidate the fund to transfer the member’s balance out of the Self-Managed Superannuation Fund.
Given that the EPoA will be given authority to act on an individual’s behalf, care must be taken when selecting who will be nominated.
Trustee of the fund
Under the Superannuation legislation, an individual cannot be the sole trustee of a SMSF. For a fund with two individual trustees, this will present an issue when one of the trustees passes away. When this happens, the surviving trustee has two options:
- Appoint another person to act as the second individual trustee.
- Appoint a Corporate Trustee (of which the surviving trustee could be the sole director).
This is an important matter to consider. As outlined in the case of Katz v Grossman above, the remaining trustee upon your death will usually have some control over how your death benefit is paid.
It should also be noted that upon this change of trustee, the fund’s assets and investments must all be updated reflect the change in legal ownership. For this reason, some trustees elect to pre-empt this transition by appointing a corporate trustee and updating the fund assets’ legal owner prior to the passing of either trustee. This also relieves some pressure on the surviving member when dealing with the legal affairs surrounding the death of the other.
Payments of superannuation death bene ts to tax law dependants will be tax free, however when payment is made to someone who is not a tax law dependant (such as an adult child), tax is payable on the taxable component at a rate of up to 15% plus the Medicare levy.
There are various planning strategies which can be implemented to minimise the tax payable by your beneficiaries on receipt. This includes the utilisation of re-contribution strategies where possible, specifying that particular pension accounts are to be paid to specific beneficiaries, drawdown of pensions prior to death or the preparation of vesting directions.
Where the recipient of the death benefit is a tax law dependant, the member may wish for that benefit to be paid in the form of a reversionary pension. This means that the member’s balance is retained in the fund after the death of the member, and is paid to the beneficiary in the form of a pension. The major advantage of this is that the fund does not need to dispose of assets to fund the payment of a lump sum death benefit.
It is important to ensure that your Binding Death Benefit Nomination and Reversionary Pension Nomination align with one another.
Whilst all trustees of the fund are equally responsible for managing the fund and making decisions, some funds do tend to have one trustee who oversees the process. It is important to ensure that accurate records are maintained showing where the fund has assets and investments, and who the contact people are in relation to these. This will mean that if one member passes away, the surviving members are able to continue to manage the fund with minimal stress.
How can Nexia Australia help?
As each individual case is different and requires specific review to ascertain how to best meet your requirements, please contact your Nexia Financial Advisor to arrange a time to meet and discuss your individual circumstances.