Estate planning is an important part of everyone’s life, even though it may not be the most enjoyable. Understanding how and when (and to whom) your assets will be passed down can provide not only peace of mind for you while you’re alive, but also to your loved ones once you’ve passed.
Considering that your superannuation will likely be one of the largest financial assets you hold at the time of your passing, it’s important to understand how your SMSF affects your estate planning. We discuss whether you should include an SMSF in your will, below.
What happens to your super when you pass away?
It surprises many people to learn that superannuation doesn’t automatically form part of a person’s estate when they pass away. In fact, it can come down to the discretion of the SMSF trustee as to how to pay out superannuation assets upon the death of a member, depending on whether there was a death benefit nomination made to a beneficiary and whether it was legally binding or non-binding. In the case of a self-managed super fund, the SMSF trust deed will take precedence over the will of a member — which makes consideration for your full estate planning needs even more important when setting out your fund’s trust deed.
The role of a binding death benefit nomination
A binding death benefit nomination is a legal tool that makes it legally binding on the trustee of a super fund to pay out your death benefits to the nominated beneficiary (unless it would be otherwise unlawful to do so). SMSFs are no exception — a binding death benefit nomination (BDBN) should be included in every self-managed superannuation fund’s trust deed and is perhaps one of the most influential components of your estate planning when it comes to your super.
Your death benefit nomination can be non-binding, however, this places less legal duty on the trustee of your self-managed superannuation fund to pay your death benefits to your nominated beneficiary — instead, they will just take your nomination into consideration. Without a death benefit nomination in place of any kind, payment of your superannuation death benefits will be at the discretion of the fund’s trustees. This may include being paid to your estate via your legal personal representative.
Top Tip: most BDBNs on large super funds expire after a period of three years. This could potentially be untimely if the member’s death occurs before they’re able to renew their nomination. Consider using a non-lapsing death benefit nomination to ensure that the BDBN remains in force unless otherwise revoked or amended by you.
Superannuation death benefits
When an SMSF member dies, their superannuation death benefit comprises their available superannuation balance at the time of their death, as well as any insurance (such as life insurance) that is paid out.
Who can receive super benefits?
Generally speaking, an SMSF member can leave their superannuation benefits to anyone of their choosing, however, depending on whether they’re considered a dependant under super law will affect the tax implications on the distribution of the death benefits. Under super law, a death benefits dependant is typically classified as the deceased member’s spouse or de facto spouse, a child of the deceased (of any age) or a person that’s in an interdependency relationship with the member at the time of their death.
Do SMSF trustees need to include their SMSF in their Will?
Ideally, to construct a robust estate plan, you should hold a valid will that covers all of your other assets and wishes for your estate, as well as a BDBN within the SMSF deed. Just as your personal objectives will drive the investment strategy and investment decisions you make for the fund members, so too with they guide how you choose to distribute your estate assets and super death benefits when you pass away.
What happens if the SMSF holds property at the time of a member’s death?
The ability to purchase wholesale managed funds and direct property is a large appeal of self-managed super funds for investors. If there is a property owned directly by the fund at the time of a member’s death, then it can be a complex process to sell down the property, pay off any Limited Recourse Borrowing Arrangements (LRBA) and distribute the member benefit to the nominated beneficiaries.
Importantly, this can impact the remaining fund members’ assets, balances and investment strategy. It’s always advisable to protect your fund, and its assets, including in the event of a member’s death, through a professional adviser in law and personal financial advice.
Dealing with the stress of a deceased member is an incredibly emotional and stressful time. Seek the guidance you need to structure your limited recourse borrowing arrangement and understand more about SMSF property investment both now and upon the death of a member by speaking with SMSF Loan Experts today.