Preparing for the inevitable

It really is the ‘other’ way – what happens when you don’t plan your estate?

We have seen situations where, for example, in second marriages the husband and wife are in an SMSF and one of them passes. If there is no binding death benefit nomination, then the remaining member trustee has the right to decide where the death benefit goes.

So for the sake of certainty it is important to have a death benefit nomination. Some other things you can do [with an SMSF] in the estate planning context: for underage children, you can create pensions out of the fund either until they reach 18 and they become independent, or 25 if they are still dependent in that gap period. You could make detriment payments too. So there are a number of things estate planning in relation to your SMSF can assist with and improve the way in which your super fund death benefits are used and spread around the family.

What are some common misconceptions when it comes to estate planning and SMSFs?

The biggest issue is clients seem to think their will can handle it all. That is not so. Your membership of an SMSF makes you a beneficiary of a trust and that trust is governed by the trust deed and controlled by the trustee of the fund. Just saying in a will that you want your death benefits to be given in a certain way won’t achieve it at all. It has to be in the form of a binding death benefit nomination which accords with superannuation law.

[Also,] a lot of people feel that estate planning is costly and don’t take into account the value. With most people – particularly the current baby boomer generation who own their own home and have some compulsory superannuation and perhaps have a life insurance policy – it is not very hard to get to at least $1 million-plus in your estate. To be able to have peace of mind in relation to that estate, half of one per cent of the estate is all you would need to spend.

Why is incapacity an important yet overlooked part of the estate planning process for SMSF trustees? What can happen if it is not appropriately dealt with?

Trustee incapacity can result in a member trustee losing their role in the SMSF, and thereby being at the mercy of the other trustee members of the fund. When a trustee becomes mentally incapable, all sorts of questions arise. They now can’t take part in the management of the SMSF and the question then becomes, ‘will somebody else take part in the management as their substitute and look after their entitlements or is that going to be left to the other trustee members?’

One minute everything [can be] going along solidly, and you think ‘I am going to live till 85 and have a wonderful retirement’ and then 10 seconds later you have a stroke and everything changes overnight. You have to ignore the ‘likely’ result and instead deal with a ‘possible’ result. That means setting up structures to handle trustee incapacity at the very time the SMSF is set up, that way there are no gaps.

When it comes to estate planning in SMSFs, is a corporate trustee or an individual trustee more strongly favoured?

A corporate trustee is always more strongly favoured, no matter what, for the simple reason that corporate trustees don’t die. Individual trustees, unfortunately, have a way of dying and when that happens, any assets that they held in their name as the individual trustee of the fund have to then be transferred into the name of the new individual trustee. That transfer can be expensive, time-consuming and administratively cumbersome.

There is also the new ‘speeding tickets’ regime for SMSFs. These ATO on-the-spot penalties are levied on a per-trustee basis. So if you are a corporate trustee you are levied once, but if you have two individual trustees the same amount is levied on both, so you actually just doubled the penalty. That is a very major reason why you would want a corporate trustee.

With LRBAs being utilised more frequently in SMSFs, how do they factor into estate planning and are there risks involved?

The biggest risk in LRBAs is the liquidity risk. If a member dies and there is a substantial part of the super fund benefits tied up in a piece of real estate [for which] the fund has borrowed ... then the fund has to work out how they are going to pay the member’s death benefit. [The fund] must do this in a reasonable time and may require that the property be sold. The sale of that property itself might cause issues because it may not be the appropriate time to sell, the market might be down, and it might be the type of property that takes time to sell effectively for various reasons.

What are re-contribution strategies and how can they potentially save a trustee money?

Re-contribution strategies can change the dates and the way calculations are made in respect to the character of the contribution, whether it’s concessional or non-concessional and so on. Re-contribution strategies are popular, and in the hands of a good adviser can be a very good way of saving money and ensuring you are getting the maximum efficiency out of your superannuation benefits.