Low-balance SMSF debate ignores estate planning
The focus on comparing returns between smaller-balance SMSFs and the public offer funds disregards other compelling reasons to set up an SMSF, including estate planning strategies, says an industry lawyer.
Following the release of the Productivity Commission’s report on the efficiency of the superannuation system that suggested that SMSFs with less than $1 million were not competitive against retail super offerings, small-balance SMSFs have again been facing backlash, said Townsends Business and Corporate Lawyers principal Peter Townsend.
Both the Industry Super Australia and the Association of Superannuation Funds of Australia, in particular, have focused heavily on these findings in recent commentary.
Mr Townsend said the problem with this “public flagellation of SMSFs” based on comparing their returns with those of the players at the big end of town is that it misses the point that having an SMSF is not all about investment returns.
“In fact, especially from an estate planning viewpoint, there are compelling reasons why an SMSF irrespective of fund balance, will always trump a big public offer retail super fund every time,” said Mr Townsend.
“Whilst the sole purpose of a superannuation fund is the provision of retirement benefits, in most cases there is likely to be something left over when the fund member dies – in some instances, especially where life insurance is taken out via super, quite a substantial sum of money, and perhaps well over $1 million at that.”
Given that a superannuation fund at law could ultimately be a discretionary trust and the fact that on the death of a member that death benefit may be pretty large, said Mr Townsend, it is absolutely imperative that a fund member make a binding death benefit nomination (BDBN) to direct the trustee of the fund regarding how and to whom to pay their death benefits.
“Unfortunately this is where the big public offer retail super funds are sorely lacking. Most only offer members the ability to make a BDBN with a single level of nomination,” he said.
While a member can nominate one or more persons and or their estate in varying amounts, they cannot nominate a further level of beneficiaries if none of the persons at the primary level are able to accept payment, he explained.
There is also a three-year expiry date, so that if the member doesn’t remember to renew the BDBN within the three-year period, the nomination lapses and the trustee’s discretion rules again, he warned.
“In fact, dying without a valid BDBN can be actually worse than dying without a valid will – at least if you die intestate, the State or Territory laws provide for a statutory order of persons to whom your personal estate will go to when you die. Not so with super – the fund trustee has an absolute discretion regarding to whom to pay your death benefits,” he said.
“In recent years, some public offer retail super funds have been offering a non-lapsing BDBN, but that’s about the most you can hope for from these funds.”
An SMSF, on the other hand, he said, offers much greater flexibility, ”subject only to the terms of the relevant fund trust deed and the requirements of SIS law as regards to whom and how the benefits may be paid”.
“This ability is particularly important for fund members who are in a blended family, where the restrictions of a public offer retail super fund are completely inappropriate.”
Mr Townsend used an example to explain some of the limitations of estate planning options through public offer funds compared with SMSFs.
“Suppose Marge is a widow with three adult children, Bart, Lisa and Maggie. She meets Daffy, a widower with three adult children Huey, Luey and Duey. Marge and Daffy hit it off and get married. Neither of them has a lot of money. Each of them has around $400,000 in super, and they pooled their other assets together to buy a modest house to live in as tenants in common in equal shares,” he explained.
“Their estate planning objective is to look after each other in terms of somewhere for the survivor of them to live and something to live on, then when the survivor of them dies, their respective assets are to go to their own respective children.”
Under their wills, he said, they will give each other a right to live in the deceased’s half of the home until the survivor of them dies, whereupon the deceased’s half of the home goes to their own children.
“To support the survivor during their life, they want to give each other a lifetime pension from their super death benefits because there isn’t enough in their personal estates, and then on the death of the survivor of them, the death benefits are to go back to the children of the deceased fund member or failing that, to the fund member’s estate for the benefit of their grandchildren,” he said.
“There is no way that a public offer retail super fund will allow Marge and Daffy to make a non-lapsing BDBN that will achieve all those ends. This strategy is only possible with an SMSF with an appropriately worded trust deed.”