Mortality will embrace even the most durable of us. And what we leave behind and who we choose to leave it to, is an essential consideration for self-managed superannuation fund (SMSF) trustees.
Estate planning is a complex topic that you need to take expert advice on and think carefully about. Within the context of an SMSF it’s important to know about all of the benefits and implications of your estate planning structure.
10 essential estate planning tips for SMSFs
1. Death and disability
Estate planning is not just about what happens in the event of your death, it also needs to address what would happen if you suffered trauma or permanent disability and couldn’t work. While this information focuses mainly on death benefits it’s important to check out the entire spectrum of your estate planning landscape and cover all eventualities.
2. Where there’s a Will there’s not always super
It can come as a surprise to discover that a Will, in isolation, doesn’t stack up when it comes to dispersing SMSF super benefits upon death.
Since your super benefits don’t automatically form part of your estate, your super benefits might be paid out by your super fund trustees, before probate is granted on your estate. This part of the equation can be important to make sure your family isn’t worse off financially because obtaining probate can sometimes be time-consuming and complex. However, the good news is your super can be paid to your estate if you desire. You just need to know how to make this happen.
3. Your SMSF trust deed is the key
The key to knowing how your death benefits will be paid is governed by your SMSF’s trust deed. You need to get explicit in what you say and how you say it. The clearer the detail, the less likely anyone will be able to challenge your nominated wishes.
Always remember, in an SMSF the trustees have discretion on how death benefits are distributed unless a binding death benefit nomination (BDBN) is in place at the time of death. To be valid, your BDBN must meet the strict requirements of the superannuation legislation.
4. Know your super fund laws and death benefits
An SMSF can only directly pay a death benefit to superannuation dependants, which includes a spouse, a de-facto spouse, a child or any person who is financially dependent on you at the time of your death – all of whom can be nominated in your SMSF deed. If you want your benefits to go to another person you may direct the benefits to your estate and make a provision for them in your Will.
5. Defining inter-dependency
In addition to usual considerations of spouses and children, benefits could also be left to a person that you have an inter-dependency relationship with. Two people have an inter-dependency relationship if:
- they have a close personal relationship
- they live together
- one or each provides the other person with financial support, and
- one or each provides the other person with domestic support and personal care.
6. Looking after your death benefit recipients
You have a range of options including the following.
- Leaving the payment and how it’s paid to your surviving SMSF trustees to determine.
- Making a binding death benefit nomination that specifies the recipient/s, the payment/s, and how and when it is to be paid.
7. Work out who your tax dependants are
This is important as the beneficiary of your death benefit is taxed differently if they are a dependant for tax purposes, which is different to the definition of dependants for determining who can be paid directly from a superannuation fund. Your tax dependants are:
- a spouse or former spouse, including a current or former de-facto spouse
- a child under 18
- anyone with whom you were in an inter-dependency relationship just prior to death
- any other person who was financially dependent on you at the time of your death.
8. Check out tax concessions on superannuation death benefits
Where your superannuation is paid to a tax dependant as outlined above, they should receive the benefit tax free, irrespective of whether they are paid directly from the SMSF or via the estate.
However, if the beneficiary is not the tax dependant, there may be tax payable. A death benefit is made up of a tax-free component, which reflects the portion of the benefit made up of after-tax contributions, and this portion is received by the beneficiary tax free.
The remainder of the benefit is the taxable component which could be taxed at up to 16.5%. If there are insurance proceeds included in the benefit the tax payable may be higher.
9. How the tax-free status of your super fund death benefit works
Current regulations confirm pension earnings remain tax exempt upon the death of a fund member receiving a super pension, even when there’s no reversionary pension. However, you shouldn’t view this as a reason to delay doing anything. BT’s Head of Financial Literacy & Advocacy, Bryan Ashenden notes: “When a member has passed, there is an obligation on the remaining trustees to ensure that the deceased member’s benefit is paid out as soon as is practicable. Whilst this timeframe isn’t defined, there shouldn’t be any unreasonable delay in making the payment, but the trustees should have a reasonable time, if there is no binding nomination, to confirm who the potential beneficiaries are and determine their decision on where benefits will be paid.”
10. Review and update
Your estate plan, like your life is an evolving creation. As with the rest of your SMSF operations, including your trust deed and investment strategy, you need to regularly review and update as your circumstances change.
This information is general in nature and does not take into account your personal needs, objectives or circumstances and therefore, before acting on it, you should consider whether it is appropriate for you. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.
BT Portfolio Services Ltd ABN 73 095 055 208 AFSL 233715 (BTPS) is the operator of BT Panorama (the investor directed portfolio service). BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) is the issuer of BT Cash. Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 (WFSL) is the issuer of BT Managed Portfolios (together, the Panorama Products). An Investor Guide is available for BT Panorama and a PDS is available for BT Cash and BT Managed Portfolios and can be obtained by calling 1300 554 267, or visiting BT SMSF. You should obtain and consider the relevant disclosure documents before deciding whether to acquire, continue to hold or dispose of interests in the Panorama Products. In addition, BTPS is also the provider of the SMSF Establishment Service and the SMSF Administration Service. The Guide and Terms and Conditions for each of these services are available by contacting BTPS.
BT Portfolio Services cannot give tax advice. Any tax considerations outlined in this article are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. The tax implications of BT SMSF can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser. © BT Financial Group – A Division of Westpac Banking Corporation. Information current as at 30 August 2017.