14 Feb Check trust deed to protect super in estate planning
For many people, their superannuation is their biggest asset when they retire – and often when they die as well.
Despite this, there are still a number of misunderstandings about what steps need to be taken to manage and direct super, as part of estate planning, to ensure it goes to the intended person. This is particularly true of SMSFs.
Perhaps the biggest misconception in estate planning is that super benefits automatically form part of an estate. However, this is not the case and super cannot be directed to beneficiaries via a will unless other supporting documentation is in place and it is allowed by the relevant trust deed.
Instead, if no valid directions have been provided, the trustee of a super fund – whether an SMSF or a public offer fund – is responsible for the distribution of death benefits.
SMSF members can leave instructions for trustees on how they want their super benefits to be distributed, so long as this is permitted by their trust deed. Each deed can be unique in characteristics and terms so it is vital to ensure the original documentation is reviewed whenever dealing with an SMSF.
There are two main ways for SMSF members to direct super funds as part of estate planning.
One is to have a binding death benefit nomination (BDBN) as part of the SMSF trust deed that names a valid beneficiary.
A BDBN is an election made by a member that is binding on the trustee and means the trustee must direct any benefits remaining in a member’s super account in the way the member has instructed.
However, there are strict rules around BDBNs. They must comply with the requirements of the fund’s trust deed to be effective, and not all trust deeds permit BDBNs, so it can’t be assumed any BDBN is valid.
If the trust deed does allow BDBNs, there are usually a number of requirements that must be met to ensure they are valid.
Legislation requires BDBNs to:
• be in writing,
• be signed and dated by the member in the presence of two adult witnesses, and
• contain a declaration, signed and dated by the witnesses, that the member signed the notice in their presence.
Other requirements that may be included, depending on the trust deed, are that the BDBN:
• may lapse after a time period (usually three years) or is non-lapsing,
• can be revoked by the member at any time, via written notice to the trustee, and
• must contain enough detail to identify the member and/or beneficiaries.
There may also be less common provisions, such as:
• restrictions on the way in which a trust deed can be amended if that amendment impacts on the BDBN,
• requiring the trustee to consider and accept a BDBN before it is valid,
• specifying the form the BDBN should take, which sets out the percentage entitlement of each beneficiary and specifies who can be accepted as eligible beneficiaries, and
• empowering the trustee to accept amended BDBNs from the financial attorney of a member – it is commonly accepted that a trustee should accept a BDBN that simply renews an existing BDBN, the difference here is that the trustee may allow a financial attorney to change the original intention of the member.
One key issue to be aware of is that BDBNs may automatically lapse after three years. If this happens, then the SMSF’s trustees will decide who receives the death benefits and it may not necessarily be the person the deceased had chosen.
It is possible to have a non-lapsing BDBN, which, as the name suggests, will not expire.
It’s worth checking the trust deed of the fund to check whether BDBNs are allowed and, if so, what form they may take.
The other way to direct super benefits as part of estate planning is to set up a testamentary trust. This is a trust that comes into effect on a person’s death, with the SMSF’s BDBN directing death benefits into the trust.
This then means the super funds become part of the estate and can be directed to beneficiaries through a will.
This approach has a number of advantages, including tax effectiveness and the ability to protect assets.
The tax treatment of the benefits depends on who the beneficiaries are. If they are dependants for tax purposes (such as a spouse or child under 18), then it will be tax-free.
For others, the benefit will be taxed according to individual circumstances. There are options for structuring the will and the trust so that some components of the benefit are tax-free, and also to segregate super entitlements for the benefit of the death benefit dependants only (commonly referred to as a super proceeds trust).
Whichever approach is taken, it is important to ensure there is appropriate documentation and records to accompany any directions, and that the directions are allowable under the SMSF’s trust deed.
A good first step is to check the trust deed and fully understand what is permitted and what directions are already in place. Don’t assume the trust deed reflects your wishes, unless you have taken steps to make sure this is the case.