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!!

Setting up a Self Managed Super Fund

After making the decision to setup a self-managed super fund, there are a range of important decisions and steps about how to structure and operate your fund to get it started.

When setting up a self-managed super fund, you take on the role of either a trustee or director of a company which acts as the trustee of your fund.  A trustee is a person or company that holds and invests the fund’s assets for the benefit of each member’s retirement.  You have the choice when establishing a self-managed super fund to have individual trustees or appoint a company to act as the trustee.

More than 70% of all self-managed super funds are established with individual trustees, with more recent statistics showing only 10% of new funds being setup with a corporate trustee.

It is a commonly held view that a corporate trustee is a far superior trustee structure within a SMSF, which was recently supported in the recommendations to government in the Super System Review.  Further information on this topic can be founding in my article, “which trustee structure is right for me?”

As a trustee or director, you are responsible for running the fund and making decisions that affect your retirement interests and that of each member. Therefore, you must act in the best interests of all fund members when making decisions, ensuring that the fund is managed separately from your own affairs and that the money in the fund is only accessed when the law allows you to do so, such as in retirement.

There are some important considerations when setting up a self-managed super fund, including deciding on whether each member will act as individual trustees or a company act as trustee in which you and the other members will be directors.  You also need to ensure that you are eligible to act as a trustee; therefore you can’t be:

  • a bankrupt,
  • someone charged with a dishonesty offence; or
  • have been subject to superannuation law penalties.

Furthermore, you must ensure that the fund meets the residency requirements to be a complying fund and receive tax concessions.

A self-managed super fund is allowed up to 4 members, with each member required to be a fund trustee or director.  This requirement is to promote engagement and equal responsibility amongst all members of the fund.  In addition, no member can be an employee of another member, unless they are related and finally no trustee can be paid for their duties or services as being a trustee.

It is possible to setup a self-managed super fund as a single member fund. Where the fund has a corporate trustee, you can also be the sole director of a trustee company.  Alternatively you must be only one of two directors ensuring that the other director is either related to you or is not employed by you.   Where you wish to have individual trustees, you must have two trustees in which in addition to you, must include a person you are related to or is not employed by you.

The process to setup a SMSF

The setup of a SMSF requires a range of steps to be completed to start operating your fund.  The first step is to arrange for a trust deed to create the fund.  This is the “book of rules” that will govern its operation and will include rules around acting as a trustee, membership, contributions, benefits and anything else to do with the fund.  The preparation of the book of rules is prepared by a lawyer who will draft the necessary rules for you.  This may be a standard set of rules or may require tailoring to meet specific requirements of the fund members.

The fund will also be required to appoint fund trustees, which must be consented to in writing.  You as a trustee will need to sign a trustee declaration within 21 days of becoming a trustee or director, stating that you understand your duties and responsibilities as a fund trustee or director of the corporate trustee.  You will need to complete for various registrations with the Australian Taxation Office to not only become regulated, which must be done within 60 days, but to also apply for a Tax File Number (TFN), Australian Business Number (ABN), along with potentially requiring additional registrations including GST and Pay-As-You-Go withholding (PAYGW).

You must apply to become a member of the fund and once accepted have the fund record your tax file number to ensure that it can accept certain contributions.

You will be required to setup a bank account for your self-managed super fund to manage the fund’s operations including accepting contributions, making investments, receiving investment income and pay all fund expenses and liabilities.  It is important that the super fund bank account is kept separate to any individual or business bank accounts that you may have.

Once the fund is legally established, it is important that an investment strategy is prepared that sets out the investment objectives and how you plan to achieve them, having regard to issues including diversification, risk and likely return from investments, liquidity of fund assets, the ability to pay benefits as and when they fall due, such as in retirement and generally meeting the member’s needs and circumstances.

You may wish to engage a licensed financial adviser to help you prepare an investment strategy, but you (and the other fund trustees) are responsible for managing the fund’s investments.   It is important that an investment strategy is documented to ensure that you can evidence your investment decisions and show that they comply with the law.

In addition, as the fund gets underway, you should give appropriate consideration to the appointment of professionals including an approved auditor, accountant or fund administrator, lawyer and financial adviser.  They will be able to assist in a variety of areas including the ongoing reporting requirements, insurance needs of the members and any death benefit nomination which sets out who receives your super benefits in the event of death.

Setting up a self-managed super fund gives you the opportunity to actively manage your own super and make your own investment choices, but with it comes responsibility.  Regardless of whether someone takes a more active role within the fund, each trustee or director is equally responsible.

Watch more of our videos on The SMSF AcademyTV.

Join us for our next FREE Webinar on SMSF Death Benefit Nominations

The appropriate structuring of a death benefit nomination for the payment of death benefits from a SMSF is one of the most important considerations a member can ever make.

This webinar looks at the types of death benefits nominations available to be used within a Self Managed Super Fund and discusses some of the key issues surrounding the different types of nominations that are available.

You can also view this video on The SMSF Academy YouTube Channel

This webinar will include a guest panelist, Mr. Ian Glenister, Solicitor and SMSF Specialist Advisor (SSA) of Glenister & Co.  Ian is a well-known SMSF and estate planning lawyer and co-authors his trust deed with Grant Abbott.  In addition, Ian & Grant were the creators of the “SMSF Will” and “SMSF Life Will”, in which Ian will discuss the benefits of these important estate planning tools in this session.

  • Webinar Title: SMSF Death Benefit Nominations
  • Date: Tuesday, November 30, 2010
  • Time: 4:00 PM – 5:00 PM AESDT

Space is limited.
Reserve your Webinar seat now at:

Important questions in developing an SMSF estate plan

A lot of time is spent by trustees and professionals alike developing wealth through strategies and investment choices.  But far to often we see a lack of estate planning ultimately undo all the hard work that has been achieved over the life of the fund.

Case law such as Katz vs. Grossman and Donovan vs. Donovan are timely reminders that trustees and advisers need to give appropriate consideration to their overall estate plan, which needs to include how to deal with their superannuation in the event of death.

Too often I hear throw away lines of “the kids can sort it out” or “it’s not my problem if I’m not here” or “it will be all spent before they can get their hands on it”.  With the average Self Managed Super Fund balance now being higher than the average price of a family home, this issue needs to be given the appropriate attention is deserves.  For advisers, not appropriately addressing this issue when your “DNA” is all over the fund will only present problems later on when payment of the estate occurs.

Therefore to assist in fleshing out some of the key issues for trustees and their advisers, consider some of the following key questions that should be considered for every fund and its members:

1. What arrangements need to be put in place to pass control of the SMSF on death or incapacity of the members?

You need to consider issues such as the fund’s governing rules to allow for the legal personal representative to act as a replacement trustee and have the same rights as the deceased member/trustee to deal with their benefits. Considering an appropriate death benefit nominations is obviously of utmost importance, along with appointing an Enduring Power of Attorney who can step into the shoes of a trustee/member in varying circumstances (including incapacity).

2. What strategies can/should be employed to deal with estate taxes on superannuation benefits (i.e. taxable component, CGT within the fund)?

Consideration here needs to be given to strategies to reduce the taxable component of a member’s benefit, including recontribution strategies, multi-pension strategies and the use of anti-detriment reserves.  Strategies can also be used within pension phase to crystallise CGT on certain assets to reduce the future financial impost of CGT.

3. What will be the best way to pay a death benefit – pension or lump sum – are there specific provisions needed in the Deed to facilitate such options?

There are more options available within an SMSF than any other superannuation vehicle in Australia.  Whilst there is the ability to simply pay a reversionary pension to a spouse, consider more specific strategies such as:

  • a fund wishing to provide for a non-commutable income stream of no more than $30k per annum for two children up to age 25; or
  • the ability to pay an in-specie lump sum of the business premises to the son working in the family business.

The strategies really know no bounds…

4. Are potential death benefit beneficiaries in need of “protection”? If so, what strategies/options are available to safeguard against a vulnerable, incapable or insolvent beneficiary from losing/wasting a death benefit amount?

You need to seriously consider issues such as the impact of handing a cheque over to a 20 year old drug addict child or how to best structure providing for the benefit of a disabled child (which can be achieved through an income stream via the SMSF).  Issues such as creditor risk becomes very important, as does marital risk which appears to be something of growing importance across fund trustees.  For example, there is nothing within superannuation law that says you can’t include a clause within the trust deed to exclude particular people or class of people.  Exclusion of in-laws may be an obvious one here!!  This exclusion could relate to the ability to act as a trustee, member or beneficiary of the fund.

5. Which form of nomination is most appropriate – binding or non-binding, lapsing or non-lapsing? or should the member create a SMSF Will where the death benefit instructions become a rule of the fund?

The fund’s governing rules (trust deed) are important here, but not all deeds are the same.  The use of an off-the-shelf solution for a trust deed is not always the best outcome as it might not provide for a SMSF Will or a non-lapsing binding death benefit.  Conversely, the trustees may think it is in their best interests to review and renew every 5 years.  The discussion around some of these issues potentially needs to be given greater consideration before the fund is operational.  Professionals need to be cognisant of what type of nominations are available to be paid in accordance with the deed and in what form they need to be provided.

6. What further documents i.e. Will, Enduring Power of Attorney (EPoA), etc need to be signed to meet the members estate planning wishes and objectives?

This comes to the very heart of the issue with estate planning.  Too often I see people who think a basic Will and standard death benefit nomination as being the total solution to their estate plan.  This quite simply  not true.  Appropriate consideration to Enduring Powers of Attorney, Guardianship, Wills including the use of testamentary trusts all form an important part of the overall estate plan.  Remembering that the goal is to integrate appropriate transition of wealth from an SMSF to the estate where benefits can no longer be held within the super environment (and in the most tax effective and protective way possible).

7. Do the governing rules of the fund (trust deed) complement the member’s Will and Financial PoA?

It has been mentioned earlier, but the importance of having the right trust deed in place cannot be stressed enough.  It is important to consider issues such as voting rights of each member – is it 1 x vote each or vote per $ of account balance?  does the deed allow for the LPR to have all the same rights and conditions of the deceased member to make decisions regarding the payment of death benefits, the list goes on…

These questions are very much ‘tip of the iceberg’ stuff when it comes to fleshing out the key issues for members of a SMSF.  But by using these questions, I am sure that it will provide a foundation to be able to put in place a sound SMSF estate plan.

I’ll leave you with an interesting statistic I recently heard…  The average life expectancy of a person dying without a Will is 62.  The average life expectancy of a person dying with an estate plan is into their 80’s.  Therefore, whilst it makes financial sense to get your SMSF and estate planning affairs in order, this age statistic is compelling enough to do something about it right away!!

Self Managed Super Solutions – Final Report of Cooper Review released

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As promised, the government has been quick to release the final report of the Super System Review (“Cooper Review”).  It is a comprehensive report (overview & recommendations are 70 pages alone) covering the review into governance, efficiency, structure and operation of the superannuation industry.

At this stage, it is unclear what the government may adopt from these recommendations.  It is quite clear that the report is now in the public domain for ongoing consultation to develop standards with industry alongside the ‘Future of Financial Advice’ reforms and ‘Future Tax Review‘.

Many of the final recommendations appear in line with the preliminary report issued by the Review Panel on 29 April 2010.  I have outlined below the key recommendations issued in the Final Report (contained within section 8).  I have highlighted in RED, some of the key issues from the review impacting SMSFs:

No. Recommendation
8.1 No change to the current SMSF limit  of 4 members
8.2 Sliding scale penalty regime based of seriousness of breach.  To applied to trustees/directors, not to be paid from SMSF
8.3 Greater ATO powers to enforce rectification of specified contraventions within specified timeframe
8.4 Mandatory education for trustees that have contravened SIS requirements.  Training to be paid for by Trustees, not the SMSF
8.5 ATO to be given powers to issue binding rulings
8.6 Development of SMSF specialist knowledge component of RG146 for licensed advisers
8.7 No replacement of Accountant’s Exemption. Government should legislate to require advisers to hold an AFSL to establish an SMSF
8.8 Approved Auditor registration with ASIC, to be governed by ATO as Regulator
8.9 Complete audit independence. Approved auditor independence standards for auditors to meet as part of ongoing registration requirements
8.10 Borrowing provisions to stay… review in 2 years time subject to impact of recent consumer protection changes announced
8.11 Credit providers to collect and provide information based on level of finance being provided to super funds
8.12 Abolish 5% in-house asset limit. Five year transition period to dispose of IHA or convert to a Small APRA Fund (SAF).
8.13 Prohibition on in-specie share transfers – where underlying market exists, must be conducted through that market.  Sworn valuations required for Business Real Property transfers
8.14 Prohibition on collectables and personal use assets in SMSFs. Five year transition period to dispose or convert to SAF
8.15 Better collection of statistics relating to SMSFs to understand the sector and its performance
8.16 All SMSF assets to be valued each year at market value
8.17 ATO and industry to publish valuation guidelines for consistency
8.18 Amend Corporations law to ensure SMSF trustees provide all members with certain key information on an annual basis
8.19 Amend legislation to remove unnecessary trustee administrative burdens (i.e. trustee minutes)
8.20 Proof of identity checks for all people joining SMSFs, whether establishing a new fund or joining an existing fund
8.21 SMSF registration to capture details of person providing advice in establishing SMSF and relevant service providers (for ASIC & ATO risk assessment processes)
8.22 Limitations of naming rules
8.23 Improved system to provide SMSF information to APRA regulated funds to allow for immediate processing of rollover requests
8.24 Criminal and civil penalties to discourage illegal early release
8.25 Greater penalty rates (non-complying super fund tax rate) for illegal early access
8.26 SMSF rollovers to be captured as designated service under AML/CTF Act
8.27 No need for trust deed updates; automatically deem anything permitted by SIS or Tax Act to be permitted by Fund’s governing rules.
8.28 Covenant set out in section 52(2)(d) of SIS, separation of fund assets to be replicated in a SIS operating standard
8.29 Amendment to investment strategy operating standard so that SMSF trustees are required to consider life and TPD insurance for SMSF members as part of their investment strategy

It appears that the Review Panel has not had to reconsider many issues from its Preliminary Report.  Some of the issues that they appear to have reconsidered include:

  • Providing Small APRA Funds (SAFs) as an alternative retirement vehicle, in particular for those who want to invest in collectables or have in-house assets (subject to 5% limit);
  • Change of view relating to use of Super Complaints Tribunal (SCT) for SMSFs (no longer appropriate)
  • No longer pursing ‘gatekeeper’ mechanism for establishment of SMSFs. Removal of accountant’s exemption provides opportunity to improve overall advice framework for setting up a fund.
  • Slight softening in audit independence requirements, however ASIC to develop approved auditor independence standards for SMSF auditor to meet  as part of ongoing registration.  It will be interesting to see how vigorous the accounting bodies are in pursuing a softening of this complete independence stance of the Review Panel.
  • Bringing the issue of ‘under insurance’ into the SMSF spotlight by having trustees consider as part of the fund’s investment strategy.

It was pleasing to see that there is no place for compulsory education (unless a serious breach has occurred), nor any requirement for particular academic, professional requirements to operate a SMSF.  It will however now be up to the respective professions (SMSF service providers) to provide trustees with the relevant advice, guidance and tools to deliver the retirement objectives that they would like to achieve.

Whilst the Final Report has now been released, it is just the beginning of a range of changes about to impact SMSFs and the industry.

(C) The SMSF Academy 2012
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