Self-managed Superannuation Funds and the Importance of a Will and Binding Nomination
In the sometimes morbid world of estate planning, it can be easy to bury your head in the sand and avoid having to make decisions that surround your death, or the death of a loved one. However, having those conversations and organising things like a will ahead of time is the best way to secure your family’s future. This is the same for people with a Self-Managed Super Fund, and the following is a real example of a situation that comes up fairly regularly.
The situation in question is a single-member superannuation fund and the member had recently died.
The deceased member had seemingly done everything right, had a will and a binding death benefit nomination (BDBN) and reviewed them recently before his death. However, things can be overlooked, as was the case here.
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.
Whilst it may be prudent, the Trustees are not required to pay attention to the will, and the fund can continue with a single trustee for up to 6 months before it ceases to be a SMSF.
With many nominations, the children and surviving spouse are nominated as dependant beneficiaries. However, the tax consequences of distributions from the fund are rarely taken into account, and these can prove to be significant.
Back to the specific example at hand – the deceased member had been divorced and remarried, had 3 adult children to his first wife and 1 dependant child with his new wife. The will had his eldest son, who is also a trustee of the fund, and his new wife as legal personal representatives. Unfortunately neither could agree, 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 adult son was already a trustee and in accordance with Section 17A(3) could appoint a legal personal representative as the trustee, however 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 the tax obligations could have been mitigated with some careful planning.
The bottom line
A massive takeaway from this case is that in SMSFs, estate planning and other asset distribution matters, careful planning and review is essential. This will make sure that in the event of your death, your assets go to exactly who you want, and are distributed accordingly. It can also save a lot of headaches for your surviving family, and allow them to look after themselves in a time of grief and loss.
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