Case studies show there are several estate planning strategies SMSF members should be aware of if they are to avoid unintended, and often devastating, consequences.
While death might be inevitable there is no certainty over timing. The unexpected death of the member of an SMSF can cause many problems for those left behind.
As with all superannuation funds, the death of an SMSF member will mean that a benefit becomes payable to the member's beneficiaries. However, it also means that a trustee vacancy arises which can potentially be exploited by the remaining trustees to divert death benefits away from where they were intended to go.
Advisers should consider with their SMSF clients the issues that will arise following the death of a member and the strategies that can be used to address them.
Failing to plan in advance for the death of SMSF members can lead to unintended results as the following examples (which are based on actual court cases) show. Applying the lesson to be learned in each example will assist your clients to ensure that SMSF death benefits go where they are intended to go.
Case study one
A father made a non-binding death benefit nomination stating that his death benefits should be shared equally between his son and daughter. Much of the death benefit (over $1 million) was held in an SMSF. The father had appointed the daughter as joint trustee of the SMSF following the death of his wife. Upon the death of the father, the daughter then appointed her husband as a new trustee. They then paid the SMSF death benefit to themselves leaving nothing for the son.
The son tried to argue that the actions of his sister were invalid. However, the court found itself unable to change the outcome.
Lesson number one: Do not rely on wills or non-binding nominations to distribute superannuation death benefits. Neither are legally binding on an SMSF trustee.
Case number two
An SMSF had a husband and wife as the only trustees and members. The wife died leaving about $650,000 in the SMSF. In her will she expressed the desire that her entitlements under the SMSF be applied to her children with no entitlement paid to her husband. Following the wife's death, the husband appointed a corporate trustee to the SMSF - with himself as sole director and shareholder. The trustee company then paid the death benefit to the husband.
The court held that the executors of the wife’s estate were not required to be appointed trustees of the SMSF upon her death and that the husband and the corporate trustee had exercised their rights and duties in a bona fide manner.
Lesson number two, A: Make sure that the SMSF governing rules are clear on the replacement of trustees (or directors of corporate trustees) following the death of a member. Consider whether the deceased member's executor should automatically become a trustee/director in their place.
Lesson number two, B: Consider using a corporate trustee structure as it handles succession issues better than having individual trustees.
Case study three
The deceased member had two adult daughters from a previous marriage. He had been married to his second wife for 20 years and they were the sole members and trustees of the SMSF. The deceased member left a death benefit of over $900,000. Once he died, the wife appointed her son from a previous marriage as co-trustee and subsequently moved the trusteeship to a company where she was sole director and shareholder.
The deceased member had made a binding death benefit nomination (BDBN) in favour of his adult daughters. The court held that the BDBN was made correctly and was binding on the trustee. Therefore the death benefit had to be paid to the two daughters.
Lesson number three: BDBNs are effective – but make sure that they are valid and do not lapse through inattention. Consider having copies held by third parties in case the BDBN is "lost" by the remaining trustee. Even more legally effective is having death benefit payments "hard wired" into the SMSF trust deed. However, be aware that it can be difficult to change them later as a trust deed amendment will be required.
David Court, partner, Holley Nethercote commercial and financial services lawyers.
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