Estate planning is crucial for self-managed super funds (SMSFs) because it ensures your retirement savings are distributed according to your wishes and tax-effectively after you pass away, avoiding disputes and providing for your family’s future financial security.
This blog will help you understand estate planning for a self-managed superannuation fund, its legal requirements, what you need to consider and the pitfalls to avoid for an effective estate plan for your SMSF.
What is SMSF Estate Planning?
Self-managed super fund estate planning refers to the process of organising your financial affairs, including your self-managed super fund (SMSF), to ensure your wealth is efficiently distributed to your chosen beneficiaries after your death.
By having a comprehensive SMSF estate plan, you can provide greater certainty about the distribution of your retirement savings and ensure your wishes are carried out as intended, even after you’re gone. The key objectives of SMSF succession planning are:
1. Ensuring your SMSF assets are distributed according to your wishes
A Binding Death Benefit Nomination (BDBN) allows you to nominate who will receive your SMSF death benefits, preventing unwanted claims against your superannuation. Having a corporate trustee structure for your SMSF can make the distribution of death benefits easier for your beneficiaries.
2. Minimising tax for your beneficiaries
A well-structured estate plan can help reduce the tax your family and other beneficiaries pay when receiving your SMSF assets. Strategies like establishing a testamentary trust or family trust can be tax-effective for intergenerational wealth transfers.
3. Ensuring the continuity and management of your SMSF
Estate planning allows you to put a succession plan in place for your SMSF trustees, so the super fund can continue to be managed according to your wishes. This is particularly important if you have an individual trustee structure, as the SMSF may no longer meet the definition of an SMSF if the sole member passes away.
Legal Requirements for SMSF Estate Planning
Self-managed superannuation funds (SMSFs) provide members with greater control over their retirement savings but also come with additional responsibilities and legal obligations. When it comes to estate planning, an SMSF trustee must ensure they comply with the trust deed, superannuation law, and taxation requirements.
SMSF Trust Deed Requirements
The SMSF trust deed should clearly outline the process for appointing and removing trustees, as well as the powers and obligations of trustees. Trust deeds should specify how death benefits are to be paid out, including whether the SMSF trustee has discretion or if a binding death benefit nomination is required.
Many trust deeds allow for the appointment of a legal personal representative (LPR) to act as trustee in the event of a superannuation fund member’s death or incapacity, but this is not always mandatory.
Binding Death Benefit Nominations
A BDBN allows the SMSF member to specify to who they want their super benefits paid upon their death. Binding nominations must be updated every 3 years to remain valid.
Non-binding nominations are also an option, which gives the trustee discretion in deciding who to pay benefits to, but the member’s wishes will be considered.
Reversionary Pensions
A reversionary pension allows the pension of a deceased member to automatically continue to be paid to a nominated dependant upon the death of the fund member. This provides certainty that the pension will continue to be paid to the intended recipient without the need for a new application.
Key Considerations in SMSF Estate Planning
To ensure your superannuation assets are distributed as you wish, you need an effective estate plan. An effective estate plan identifies your beneficiaries, determines how your SMSF assets will be distributed and implements strategies to minimise the tax and income implications on your beneficiaries.
Identifying SMSF Beneficiaries
Ensuring your SMSF trust and beneficiary nominations are up-to-date is crucial in SMSF succession planning. This allows you to clearly specify who will receive your superannuation death benefits when you pass away.
Your beneficiaries can include your spouse, children, or other financial dependents. Carefully considering the needs and individual circumstances of your potential beneficiaries is important when designating how your SMSF assets will be distributed.
Determining Asset Distribution
Your SMSF estate plan should outline the specific details of how the assets in your super fund’s investment portfolio will be distributed to your chosen beneficiaries.
This may involve setting up additional structures, such as testamentary or family trusts, to facilitate intergenerational wealth transfers in a tax-effective manner.
These secondary investment vehicles can help ensure your assets are managed and distributed according to your wishes, even as family circumstances change over time.
Strategies for Effective SMSF Estate Plan
The most important things are to have a documented estate plan that aligns with your SMSF and to review it regularly with professional advice. Clear communication with your trustees and beneficiaries is also crucial for an effective SMSF estate plan.
Review and Update Your Estate Plan Regularly
An effective SMSF estate plan requires reviewing at least every 3 years or whenever your personal circumstances change. Update your binding death benefit nomination (BDBN) regularly as it expires every 3 years. Consider creating a non-lapsing BDBN if your SMSF trust allows it to avoid it expiring.
Seek Professional Advice
Seek personal financial advice before making any financial or investment decisions. Consult with a financial adviser or an estate planning professional to ensure your wishes are properly documented.
Work with your SMSF auditor and accountant to understand the tax implications of death benefit payments. Consider establishing a testamentary trust or family trust to complement your SMSF for intergenerational wealth transfer.
Communicate with Beneficiaries
Inform your beneficiaries about your estate plans and SMSF arrangements. Discuss your intentions with your self-managed super fund co-trustees to avoid disputes.
Appoint a corporate trustee for your SMSF rather than individual trustees to provide continuity after your death.
Other Key Strategies
Ensure your BDBN is properly worded and follows the trust deed rules. Consider having a separate SMSF for your spouse to provide more certainty around death benefit distributions. Pay death benefits as a pension to dependants rather than a lump sum to keep the SMSF invested.
Potential Pitfalls and Disputes in SMSF Estate Planning
Estate planning options for self-managed super funds don’t come without challenges. Here are some key potential pitfalls and disputes that can arise in self-managed super fund estate planning:
Outdated or Unclear Estate Plans
Failing to regularly review and update your SMSF estate plan as your circumstances change can lead to unintended consequences. Unclear wording in binding death benefit nominations (BDBNs) can render them invalid, leaving distributions up to trustee discretion. Not keeping your trust deed up-to-date with your estate planning wishes can cause conflicts
Disputes Among Beneficiaries
Appointing family members as trustees who have conflicting interests can lead to disputes over death benefit distributions. Leaving a non-binding nomination rather than a binding one allows trustees to override your wishes, potentially causing family conflict. Failing to inform and communicate your estate plans to beneficiaries ahead of time can sow discord after your passing.
Challenges in Asset Distribution
Selling assets to pay lump sum death benefits can trigger taxes and costs that reduce the amount received by beneficiaries. If not all children are SMSF members, those who are have greater power over how SMSF benefits are dealt with. Contribution caps make it difficult for children to get money back into super after receiving a lump sum, negating any SMSF advantages.
How to Avoid These Pitfalls
To avoid these pitfalls, it’s critical to regularly review and update your SMSF estate plan with professional advice. Use clear, unambiguous language in BDBNs and ensure they align with your trust deed.
Communicate your intentions to trustees and beneficiaries to avoid disputes. Consider using a corporate trustee for continuity and to avoid individual trustee conflicts.
Key Takeaways
Estate planning is crucial for self-managed super funds as it ensures your retirement savings are distributed according to your wishes after you pass away. It ensures the continuity and management of your SMSF and that your beneficiaries don’t pay any unnecessary tax.
To avoid potential pitfalls, regularly review and update your SMSF estate plan with professional advice and establish clear communication with your trustees and beneficiaries.
Get Superwise About Your Superannuation with Coastal Advice Group
Superannuation is an essential part of your financial security in retirement as an Australian. Whatever stage of your career you are currently in, learning about how to maximise your long-term retirement savings plan is always a good idea.
At Coastal Advice Group, we provide the specialist superannuation advice, expert knowledge and guidance you need to help you make the right financial decisions for your superannuation strategy so you can confidently look forward to your future.
Call us or book online to secure your first appointment with us today and get started!
References:
Related Articles
How to Maximise Your SMSF Returns: Investment Strategies to Consider
Secure Your Today, Shape Your Tomorrow: Premium Financial Advice You Can Trust.