Announcing the SMSF InPractice Workshops

The SMSF Academy is pleased to introduce the October 2011 half-day SMSF workshops on Pensions and Estate Planning.

These SMSF workshops will work through case studies to outline key issues and strategies in these topical areas, in particular in light of the ATO’s draft ruling TR 2011/D3, when a pension commences & ceases.

Due to the workshop format, numbers are strictly limited.

SPAA & FPA CPD points available, along with hours counting towards CPD hours for professional Accounting Bodies (CPA, ICAA, IPA).

Find out more and register here.

Next Webinar on Super Death Benefits and blended families

With an increase in the number of blended families now in Australia, it is important to consider how to structure an appropriate and tax-effective financial result for all family members.

A lack of proper estate planning in this area could possibly lead to a loss of control of super benefits and ultimately end up in legal dispute.

The SMSF Academy is pleased to announce the next InPractice webinar, where in this one (1) hour session, our guest panelists, SMSF estate planning experts, Ian Glenister and Chris Hill will discuss and explore the common estate planning issues being confronted with blended families

Find out more and register for this webinar.

The payments of super death benefits in a blended family

Are you part of a blended family or have you as the ‘trusted adviser’ been approached by your client who has remarried for the second (maybe even third or fourth time) about their estate planning requirements.

Let’s take the example of where these remarried (or re-partnered) individuals are both members of the same Self Managed Superannuation Fund (“SMSF”), which was established when the “new” relationship commenced.  Both individuals have children from their first relationships.  They may even now have children from the “new” relationship.

With all clients being “tax conscious”, they ultimately want to pay as little tax during their lifetimes and maximise the benefits that they leave behind as well.

During a meeting, one of the member’s chides…

“When either of us die we want the survivor to have access to the deceased’s super.  However, we don’t want the survivor to be able to spend all the money as we want that to go to the deceased’s kids (from the first marriage) when the survivor is no longer here.  I don’t want her kids getting my money.  I want it to go to my kids when she’s dead.  I’m sure she’ll do the right thing…” 

The question must be asked however, will the right thing be done? 

Whilst the best intentions of the surviving spouse may be to deliver that outcome, what impact could the survivor’s children have when she’s become incompetent to undertake her role as Trustee and her eldest son has Power of Attorney (PoA) and can access the super fund accounts?

Many clients consider it a simple request. But it can be an advisor’s nightmare…

Where do we start?  Think about some of the following:

• How much income per year is the survivor to receive?
• Can any capital be commuted?
• If capital can be commuted how much and when?
• Who is to “control” the entire process?
• What about Powers of Attorney?
• Does the clients’ SMSF Trust Deed help?
• Are there any tax implications?

These only scratch the surface…

In the new world of FoFA and scaled advice, it becomes an opportunity for the advisor to show the true value of what they can provide (strategy) to deliver this important outcome for their client.  A skilled SMSF adviser must detail the importance of this issue and look for solutions to how this can be addressed.

Can it be fixed to make sure that the clients’ wishes and instructions are achieved?

There is a solution – the payment of conditional auto-reversionary and conditional reversionary pensions.

You can find out more about the estate planning issues in our next InPractice webinar on Thursday, 22 September 2011.

Note: SMSF Academy members can visit the Member’s Resource Library for further information on the payment of conditional pensions within a SMSF.

This article was written by Ian Glenister, Superannuation Lawyer & Estate Planning Specialist of Glenister & Co.  Ian is also the co-founder and Legal Office for The SMSF Academy.

The malaise of the estate plan; there’s an elephant in the room!!

I am regularly astounded when confronted with clients with significant assets and wealth that they have no estate plan.

I’m not just talking about a Will.  Yes, it is an essential ingredient of an estate plan, but it is not a total estate plan.

Over the next twenty-five years, Australia will witness the greatest wealth shift that it has ever experienced.  The “Baby Boomers”, unlike their parents, have been a generation of wealth accumulators.  When they start dying, many without any semblance of an estate plan, it will be a Lawyer’s feeding frenzy due to lack of advice and planning.

Clients are enthusiastic about wealth accumulation – minimizing tax, negative gearing, planning for holidays, buying a new car, going to the beach, spending time with friends, going to he footy. BUT, what is to happen with all their accumulated wealth when they are no longer with us?

Like any Lawyer, I am averse to giving any form of guarantee. However one I will give, in writing if needs be – everyone dies!

Unfortunately, we are all confronted with our mortality. The good Lord brings us into this world but when we arrive we don’t have any notification of exactly when we will depart this mortal coil.

Why won’t clients confront the issue of estate planning? Is it an “Elephant in the room?” Apparently so, the vast majority of people don’t want to discuss it. It is too hard, takes too long or is too challenging or confronting.

It is easier for a client to decide to re-pot the pot plants, have the cat de-sexed or see a movie than consider establishing a well documented and definitive estate plan.

What is “an estate plan” anyway?

It is a documented guide to the orderly transition of wealth from one generation to the next in the most tax effective and asset protective manner possible. Drawn correctly it will eradicate any dispute between the proposed recipient of the assets.  This will potentially eradicate any erosion of the estate assets from the legal costs of a dispute.

Clients, particularly those with significant wealth, usually have a “primary financial advisor”.  Whether it is an Accountant or Financial Planner, clients seeks advice as to how to best manage their affairs during the “wealth accumulation” stage of their lives.

Off the clients go to their advisor…

The issue of asset protection and tax minimization is discussed with the client. This raises the issue of the well exercised discretionary family trust.  Real estate assets are purchased, business are established or acquired, income distributions are made amongst the family members to mitigate a tax liability.  This “Family Trust” idea appears fantastic to the clients.  The question has to be asked:

• do they know how it all works?
• What is a Settlor?
• What or who is an Appointor?
• What does this company do again?  Oh it’s the Trustee – huh?”

Now let’s tackle retirement planning issues for the client.  Self-Managed Super Funds (“SMSFs”) continue to grow. This is the way to go – or is it? It must be. SMSF reduces the client’s tax and only pays a miserly 15% tax on its earnings, 10% on Capital Gains Tax during accumulation.  When the client retires it pays no tax. This is a marvelous revolutionary concept!!

The SMSF is established. The tax rate is great. All is going to plan except one of the members of the Fund is killed in a motor vehicle accident. What now?

Advisors are readily prepared to insist that their clients embrace such structures as Discretionary Trusts and SMSFs and for very good reason. But surely this is only half the job done?

Advisors are aware that clients can’t make provision in their Wills for Trust assets. They don’t own them. They don’t own the holiday house in the Family Trust. They don’t own the share portfolio in the SMSF.  Try telling that to the clients. The response – “… of course it’s mine I paid for it!!!”

The clients proceed through life ignorant of the fact that unless the succession for Discretionary Trusts or SMSFs is in place they will leave a potential massive problem to the next generation.  Surely they are entitled to know what should be done?

An advisor typically travels with the client throughout their “financial life.” They are there to protect the health and well-being of their client’s financial affairs.  Is it too much to expect that as well as supporting wealth growth and other strategies the Advisor is also responsible for what will happen when the clients are no longer here?

I submit that the role of the Advisor means more than tax and wealth and retirement funding advice; the Advisor gets paid for this.  Some clients use the Advisor for their entire financial lives.

• Why should a client die intestate?
• At the time of the client’s death why should their Will be 30 years old?
• Why didn’t the client have a Death Benefit Nomination for his SMSF assets?
• Why did the client’s eldest son lose his inheritance to his Trustee in Bankruptcy?
• How come the drug dependent child overdosed on the proceeds of her inheritance and died?

Can the responsibility of such events be leveled at the “primary financial Advisor”?

The issues of the second, third or even fourth marriage and blended families adds another dimension to the estate planning malaise.  Put together unhappy beneficiaries, a great deal of wealth and a Lawyer and eventually the Lawyer will find someone to blame.

Financial advice is more than saving tax and accumulating wealth for clients.  It is holistic. Making sure that a client has the appropriate estate plan I submit is also the responsibility of the Advisor.

“The clients don’t want to talk about it” responds the Advisor when challenged about their client’s estate planning issues, or “I intended to get something done for the client’s estate planning but I just didn’t get time”.

The client’s response –

• “We are too busy and we have better things to do”.
• “My wife doesn’t like to discuss it”.
• “Let the kids sort it out when we are both gone”.

Manor from heaven for the Lawyers…

Conclusion:

It is the “primary financial advisors” role to do more than simply advise on the financial life of the client.

The “primary financial advisor” has a duty to their client to make sure that their client has a well documented estate plan and that it is reviewed on a regular basis. Not to make sure that this is the case I submit is a breach of the “primary financial advisor’s” duty of care to their client.

Don’t accept from the client “Yes, I have a Will…”

Is it the right one? Not all Lawyers have the knowledge and expertise to prepare comprehensive state plans. Find the right one for your clients.

If the client won’t acknowledge the estate planning “Elephant in the room” don’t simply give up.  Keep at the client until they do something. If they don’t protect your own back, then write them a disclaiming letter.  Retain the letter on your file. This letter may save a great deal of embarrassment and angst. It may even negate the necessity of writing the cheque for the liability insurance deductible one day.

This article was written by Ian Glenister, Legal Officer of The SMSF Academy and Principal of SMSF Specialist Legal Practice, Glenister & Co.  You can contact Ian on iang@glenister.com.au or visit www.glenister.com.au

What happens to your super when you’re gone?

The only guarantee you’ll ever get from a lawyer is that one day you will die, so it is therefore important to understand what happens to your superannuation savings when you are no longer here (dead).

Whilst this can be quite a detailed and complex area, the first and most important this to remember is that you cannot make provision for the payment of your superannuation benefits in your Will.  Super is not a personal asset like your home, your car, your golf clubs or boat.  If your solicitor has made provision in your Will for this, it is invalid.

It is important to remember that all superannuation Funds are Trusts. There are special rules that surround trusts and a SMSF is no different.

Fortunately a member of a SMSF can give a specific written direction to the Trustee of their SMSF when they are alive indicating what they want done with their super after they have passed on.  This direction is called a “Death Benefit Nomination (DBN)”.

It depends on what is in the Trust Deed of your fund as to how a Death Benefit Nomination is to operate.  The Trust Deed is the answer and a very important document not just for death benefit payments.

Subject to the Trust Deed drafted by a solicitor, it may include any or all of the following nomination types:

• Non-Binding DBN,
• Binding Lapsing DBN (i.e. to review and renew every 3 years);
• Binding Non Lapsing DBN;
• “SMSF Will” or Death Benefit Rule

As the term indicates, a Non-Binding nomination does not bind the Trustee.  At the time of your death it would be up to the then Trustee of your SMSF to pay out the benefits as it saw fit.  In many respects a Binding lapsing nomination has the same effect.

A Binding Non Lapsing nomination has an unlimited lifetime but usually is not specific as to the type of assets or benefits to be paid to whomever after your death.

The SMSF Will becomes a rule of your SMSF and never lapses.  You can, like in your estate Will, make specific provision as to exactly who will get what when you are gone.  This is very tax and asset protective.  Additionally, the SMSF Will allows you to nominate who will be your replacement Trustee when you are gone.  This is another protective measure to make sure things happen the way you want them to when you are no longer here.

Who can receive my super benefits?

It is important to remember though that you can only pay your death benefits to certain parties when you are dead and gone.

For there to be no tax paid when the death benefits are paid they must be (typically) paid to:

• Your spouse,
• Your de facto partner;
• Any of your children who are under age 18 and still at school;

Payments can also be made to people who are unrelated but are in a very close personal relationship, which is defined as an “interdependent relationship”.

NB. Importantly, a disabled child regardless of how old they are they will always be a “dependant” to qualify to be paid a deceased member’s death benefits.

All the parties referred to are known as “tax dependents”.  If your Death Benefits are paid to them then no tax is paid on your Death Benefits.

What happens when there are no longer any tax dependants?

The benefits can be paid to adult children who are financially independent and classified as non-tax dependents.  If you want your benefits paid to anybody else, it must be through your estate.  There are however tax consequences if your death benefits are paid to non-tax dependents.  The Executor of your Will, known as your Legal Personal Representative (LPR) can be paid your superannuation Death Benefits.  If this was done you must then make provision in your Will as to who will be paid the benefits.  Depending on who they are will depend on if any tax on the benefits will be paid.

Regularly today, the value of the amount that you have is super is more than the value of your assets outside super; those that represent your estate. Therefore, you should give very serious attention to how your superannuation death benefits are paid.

It is also critical that the payment of superannuation death benefits not be dealt with on their own.  They play an important part in your total estate planning.   Consult a solicitor who knows about super when looking at your estate planning issues and remember, not all legal practitioners know about super!!