Tips and traps for SMSF estate planning

Well, first of all, making sure that they do have broad coverage, but in particular I would suggest that it’s very important to have enduring powers of attorney for a number of reasons, but predominantly in the event of incapacity.

So if a member trustee or director becomes incapacitated, there is scope for someone to effectively remove them and stand in their place. Without that, depending on the jurisdiction, the various guardianship wards would appoint someone or they would need to roll over that money into an industry fund or a public offer fund, so powers of attorney are very important.

The other two main documents, I guess, would be the binding death benefit nomination and, if there’s a pension, a reversionary pension nomination. Something else we have on top of that from an estate planning perspective is a death benefit guardian. Now what a death benefit guardian does is effectively oversee the decisions of the trustee following the death of an individual if there is no binding death benefit nomination or reversionary pension nomination, so it’s just an extra layer to ensure that the remaining directors or trustees continue to act in the interests of the deceased member.

Is there anything practitioners need to be sure of when they’re putting these documents together?

Yes, a couple of things. The family relationship in particular. More and more we talk about the predominance of blended families; when there is a blended family you have a step parent, a step child relationship… I’ll take a step back: the two parents may consider their children as their own but in reality they’re not so they may not advise or provide the adviser with that distinction. Following the death of the natural parent, if for example the step parent wanted to leave money to those step children, that may fail. There are ways around this, but if the adviser in preparing the binding death benefit nomination is not aware, there can be some serious ramifications because the distribution of that benefit may fail.

How often should these documents be updated?

They should be considered or reviewed annually, we think, but the general standard I guess is every three years. Having said that, if nothing changes in three years then no, I suppose an informal review annually and a more formal review every three years and a change if that formal review brings up anything that needs fixing.

So it’s circumstantial then?

Yes, very much so, yes. For whatever reason three years just seems to be the norm.

In your opinion, should SMSFs always be established with a corporate trustee structure?

Yes, and there are a number of reasons for that. There’s really no good reason for having an individual trustee, when it’s all boiled down. The main reason [people avoid corporate trustees] is cost but once you’ve paid the cost for the company in year one, well the cost is minimal after that, and so the differential in the longer term scenario is very minor.

I’ve actually been in the scenario where I’ve had clients with individual trustees and one of them has passed away and I’ve seen first-hand the additional cost that comes with having to get everything fixed. So it makes that upfront saving a false economy.

How can practitioners convince their clients that despite the extra cost, it’s worthwhile? Is it a challenge for advisers and accountants?

Yes, it is to some extent because I guess once the adviser or the accountant suggests an SMSF, one of the first things that will probably be discussed is cost, and so to add another layer of cost on can be a bit of a hurdle.

The example that I’ve just mentioned [has been used with] clients in a number of instances and they’ve seen the value in it. One of the things I say, and I suppose this is more in presentations to advisers, is that when most SMSFs are established, they’re established as two-member funds, the husband and the wife. That’s a huge generalisation, but that’s the predominance.

One of the things I say is that fund will not always be a two-member fund. Whether it be through divorce or whether it be through death, at some stage someone is going to be moving out of the fund, and if there is a corporate trustee involved it’s a much simpler and less costly process than if there is an individual trustee.

If a client has already set up their SMSF as an individual trustee, is it worth moving them over as a corporate trustee?

It’s still worth it, but there’s a lot more work involved because you need to change the investments into the name of the trustee and so on, but I can give you examples off the top of my head where it may have to be done anyway, or it may be best that it's done.

One is when they’re travelling and are going to be overseas for quite a period of time. In that instance, quite often the best way to manage that, because of the requirements regarding SMSFs being managed from within Australia, is to have enduring powers of attorney step in as trustees or directors in place of the actual members.

In that instance, if there’s a corporate trustee then the assets will still be registered in the name of the company, and so really very little needs to be done; if they are in the name of the individual trustees, then you would effectively need to change the assets into the name of the new trustees and then of course when those people move back to Australia you change it back again. So that’s one instance where making the change would make sense.

Another one is if they intend to borrow within their fund then the chances are the bank will require a corporate trustee. Some banks will accept individual trustees, but in general they do require a corporate trustee so it may have to be done at that time. So there are triggers where it is necessary or may be necessary or beneficial to make the change.

What are some of the estate planning strategies for SMSFs that hold property or do have limited recourse borrowing arrangements?

The very vital aspect, I think, is to have insurance in the fund to enable the payment of the loan in the event of the death of one of the members. There’s two main reasons for that. One is that the income from the fund may be needed to provide for the day-to-day needs of the surviving spouse, particularly if it was the major bread winner who passed away, all of a sudden the surviving spouse is needing income to live on.

The other thing the insurance does is reduce the need for… in the event that there is no surviving spouse, for example the assets are going to pass to children, they may want to retain that benefit within super so the payout of the parent's asset, for example, would be met by the cash provided by the insurance rather than the asset itself because the parent’s benefit would have to be paid out. So with proper structuring you can have an insurance coverage that doesn’t have to be paid out on the death of a member and it can be used for some planning purposes then.