For a number of people their superannuation benefits form the largest part of their estate. With recent changes to the taxation and superannuation laws allowing the passing of tax effective wealth between generations via a SMSF, estate planning in an SMSF is now an important and crucial area to be considered by all members and trustees of a fund.
In addition to a raft of new strategies, a new development in SMSF estate planning is the SMSF Will. This article considers SMSF estate planning, the taxation of death benefits from a SMSF as as well as the SMSF Will.
SMSF’s outside a person’s Will
Many people are surprised to find that their Will is completely ineffective which it comes to disposing of their superannuation benefits on their death. They wrongly assume that because they have made provision for the passing of their superannuation benefits in their Will that this will happen.
This can have a dramatic consequences as was seen in the case of Katz v Grossman  NSWSC 9334. In the Katz’s case, a member of the fund died with two children – a daughter who was a trustee of the family SMSF and a non member son. The father left $1M in superannuation benefits with a direction in his Will that all his superannuation assets were to be split between his two children equally. On this death, the remaining trustee – his daughter as trustee did not take into account this nomination and paid all of the deceased member’s benefit to herself. The NSW Supreme Court held that she was entitled to take this action under the funds’s trust deed and the Will was ineffective.
Key SMSF estate planning questions
This is where we get to work. Grab a pen and paper and if possible answer the following questions:
What is important to you in the event of your death?
This is the best question to get a SMSF estate plan started and in particular a SMSF Will started. For couples in a domestic relationship a better question for consider is:
What is important to you if you and your spouse died together yesterday?
Write down the five or six of the most important things and then rank them. What is number one, number two and so on?
When developing any estate plan, attention should be paid to the most important things on the list not those that take up number five or six or don’t appear at all. If we get this right then we have a great framework to build a SMSF estate plan.
Four SMSF Estate Planning options
There are effectively four ways of looking after your dependants or others from a SMSF on your death:
- The trustee may pay a lump sum, by way of cash or assets, from your benefits in the fund to a dependant or the trustee of your legal estate.
- The trustee may pay a pension from the fund from your superannuation benefits to a dependant. There are restrictions on paying pensions to child dependants over age 18 unless they are a student under age 25 or a child who is abled.
- A reversion of an existing pension which results in the continuation of the pension in the name of the reversionary beneficiary provided they are dependants – again subject to the child limitation above.
- Any insurance proceeds from a life insurance policy held by the trustee in your name may be used to increase the decreased member’s benefits.
Who is a dependent?
For taxation purposes there are four categories of dependant:
- A spouse or former spouse
- A child of the person who is under 18 years of age
- A person who is a financial dependant. This may include a parent who meets, in whole or part of a child’s mortgage repayments.
- A person who is an ‘’interdependant relationship’’ with the member. This is a relationship where there is mutal support including a brother and sister living together or a disabled child.
Tax and SMSF Estate Planning
The superannuation benefits of a deceased member may consist of tax free, taxable and untaxed components:
- Lump sums – if a lump sum is paid to a dependant of the deceased member it is a tax free. If paid to a non-dependant the taxable component is taxed t a rate of 16.5%. The tax free component of any lump sum is tax free to both dependant an non-dependant beneficiaries.
- Pensions – For the tax free and taxable components of a pension, if the deceased member was over age 60, then irrespective of the age of the dependant, the pension will be tax free. If the deceased member and the dependant in receipt of the pension were under age 60 at the time of death, the tax free component of any pension payment is tax free. The taxable component is assessable income with a 15% tax offset.
Note: Untaxed components are taxed differently and generally arise where a SMSF has life insurance for a member. The untaxed component of a lump sum is taxed at 31%. If received as part of a pension, it is assessable income but where the deceased member was in receipt of a pension and over age 60 there is a 10% tax offset.
The SMSF Will
With the introduction of the Simpler Super laws, the use of a binding nomination is no longer the strategic estate planning tool that it once was. And so the SMSF Will was born which allows:
- A member to maximise the tax efficiency of their SMSF estate leaving specific benefits to dependants, non-dependants and legal estate.
- Your executor to take your place as trustee of the fund on your death until your SMSF Will is carried out.
- To pay out specific assets of the funds to beneficiaries, much the same as a specific bequest in a Will.