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The Importance of a Will and Binding Nomination in your SMSF

When it comes down to it, the morbid nature of estate planning can often lead to people burying their heads in the sand. It is far easier to simply avoid having to make decisions that surround your death, or the death of a loved one, rather than face up to it. However, the importance of having those tough conversations and organising things like wills ahead of time cannot be understated, and is by far the best way to secure your family’s financial future. The same applies for those with a Self-Managed Superannuation Fund (SMSF), and in this piece we’ll take a look at an example of a real situation that comes up quite regularly.

The scenario in question is a single-member superannuation fund, and the member had recently died. On the face of it, the deceased member had done everything right, including a will and a binding death benefit nomination (BDBN) – both of which were reviewed soon before his death. Despite this, some things were overlooked, leading to a few headaches that could have been avoided.

Wills

There are two common myths with Self-Managed Superannuation Funds (SMSFs) and a deceased estate. One is that the trustee must take direction from the estate; and the second is that legal personal representatives are required to be appointed as trustees of the SMSF. In actual fact, neither of these are correct.

First of all, the Trustees are not required to pay attention to the will, although it may be prudent to do so. Secondly, the fund can continue with a single trustee for up to 6 months before it ceases to be a SMSF.

BDBNs

As is the case with many nominations, children and the surviving spouse are nominated as dependant beneficiaries. Something that isn’t always taken into account, however, are the potential tax liabilities that can arise as a result of the funds being distributed – and these can prove to be significant.

The Problem

With regards to the specific example at hand – the deceased member had 3 adult children from his first marriage, and 1 dependant child with his new wife. According to his will, his eldest son (also a trustee of the fund) and new wife were to be the legal personal representatives for the fund. Unfortunately, neither of the two could agree on many things, let alone get along. The BDBN was 30% to each adult child and 10% to the new wife. The fund had $680,000 in the member account, $350,000 taxable and the balance tax free.

The outcome

The adult son was already a trustee, and in accordance with Section 17A(3) of the Superannuation Industry (Supervision) Act 1993 could appoint a legal personal representative as the trustee. He chose not to, and proceeded under Section 17A(4), which meant the fund could continue for 6 months after the members death before it failed to meet the definition of a SMSF.

The benefit must be paid in accordance with the valid BDBN and cannot be disregarded, which meant a benefit of $204,000 to each of the adult children, $68,000 to the surviving spouse, and nothing to the dependant child. Each of the adult children paid $17,850 each tax, a total of $53,550.

There are a number of opportunities missed here. Firstly, the member’s young child will not see any benefits from his father’s SMSF; and careful tax planning could have mitigated the tax obligations arising from the situation.

The bottom line

The most critical point to take away from this situation is that carefully planning and regularly reviewing your SMSF, estate planning and asset distribution matters is the best way to ensure that your assets are distributed according to your wishes. Surviving families already have a lot on their plate in a time of grief and loss, so taking away the stress of asset distribution, wills and estate planning can be a great relief.

The complex and technical nature of estate planning can be stressful for those without experience. The Superannuation and Estate Planning team here at McKinley Plowman is on hand to help you navigate all the ins and outs, including setting up the SMSF structure, guiding the estate planning process, and taking care of all of the legwork so you can rest easy knowing your assets will be looked after, even when you’ve moved on. Give the team a call today on 08 9301 2200 or visit www.mckinleyplowman.com.au for more information.

written by:

McKinley Plowman