Don't squabble over SMSF death benefits
Savings in self-managed super funds have hit a huge $600 billion. With such big money at stake and after bitter court cases involving beneficiaries squabbling over SMSF death benefits, attention has shifted to estate planning and the measures members need to take to ensure their super goes where they want it to go when they die.
Having the right advice, documentation and wording in place can save your beneficiaries from acrimonious family feuds and costly court battles. However, many fund members mistakenly believe that once they have a will, they are covered.
Not so, says superannuation and estate planning specialist Brian Hor, at Townsends Business and Corporate Lawyers. Unless you have a binding death benefit nomination in place, the trustees of your SMSF can decide how your super balance should be distributed.
As your super is not owned personally by you but held in a separate legal entity - the SMSF trust - it is beyond the reach of your will. "If you like, the binding death benefit nomination is like a will for your super. As long as it is valid and current it will give you certainty as to who will get your super," Hor says.
But first you need to check your SMSF trust deed to see whether it gives you the ability to make a binding nomination. If it doesn't, it is easily updated.
"If you have the ability to make a binding nomination, check to see whether it lapses after three years. It's recognised it's best to have a non-lapsing binding nomination as the default setting," Hor says.
Many older-style binding nominations time out or lapse after three years, leaving members vulnerable if they forget to renew it. It has led to a number of court battles, prompting more SMSF members to switch to non-lapsing nominations. Hor says there are other benefits. "By giving your super directly to your nominated beneficiaries, it bypasses your estate, which can help protect it from a claim against your estate. It is also much faster for your beneficiaries to get the money as they do not need to wait for probate of your will." The binding nomination should be looked at, together with your will, as part of an overall estate planning strategy. "It's part of the toolbox. While your super might be a major portion of your wealth, you will likely have a reasonable amount of wealth in your own name, or other structures."
It can help you distribute wealth more tax efficiently. "The best way to look after your spouse is through super, for example, so you'll make a binding nomination for her. Then for the adult kids, because you want them to benefit at the same time, you'll benefit them in other ways using other assets via your will."
Hor says it can also help with blended families. "Where it's a married couple and the kids are their own children they are happy for their spouse to take everything because they know their spouse will look after their kids.
"But if it's a second or subsequent marriage, they will not give everything to each other because there's no guarantee after they're gone their kids from a previous marriage will be looked after." (See case study.) Hor recommends you have an estate planning specialist draw up the documentation to ensure your binding nomination, your will and your power of attorney "are all on the same page". quote
Case study: How to tie it all together
John and Mary are in their 60s. Both have adult children from a previous marriage, some of who have children of their own. They each have $1 million in their separate self-managed super fund.
When one of them dies they want to make sure the survivor is looked after but, if the survivor dies or remarries, they want the money to go to their own children. At the same time they want to save tax. What can they do?
1. They need to check their SMSF trust deeds to ensure it is possible to make a non-lapsing binding nomination with special conditions attached. 2. Make a will that includes a testamentary discretionary trust that will benefit their children and grandchildren. 3. Make a non-lapsing binding nomination to say that their own super is to be used to pay a pension to the survivor for the rest of their life but on the survivor's death (or remarriage) the super will be paid into their estate. The super is then to be directed into the testamentary discretionary trust.
Result? The survivor will be looked after for the rest of their life with a tax-effective pension from their SMSF. When the survivor dies or remarries, the pension stops and any remaining money goes via their will into a testamentary discretionary trust that will tax-effectively benefit their children and grandchildren, plus potentially protect their inheritance from business failures and relationship breakdown. Source: Townsend Business and Corporate Lawyers
Vita Palestrant was the editor of the Money section of the Sydney Morning Herald and The Age and has won several prestigious journalism awards here and overseas.