There is much confusion about the role of superannuation in estate planning resulting in estates paying unnecessary tax, and superannuation balances being distributed in a way the member didn’t want. SMSFs can be particularly helpful in achieving the desired result due to the extra flexibility they provide over public offer superannuation funds.
Anybody leaving a valuable superannuation balance cannot rely on a Will to ensure their intentions are carried out (Unlike other assets, superannuation is held in trust and is not owned directly by the member of the fund. Consequently it usually falls outside the scope of a Will).
To implement the best strategy you must have a Death Benefit Nomination as well as a Will. Consider the tax implications of balances paid out to non-dependants, and perhaps amend the SMSF Trust Deed if necessary.
Unless there is a Death Benefit Nomination, the trustee of a superannuation fund has the discretion to pay death benefits to an estate or directly to a dependant, such as a spouse, a child, or a financial dependant.
Tax may be payable on distribution, unless the recipient is considered to be a ‘death benefits dependant’ such as a spouse, child under age 18, or a financial dependant. For this reason, whenever appropriate, superannuation balances should be paid to death benefits dependants.
There are many estate planning options that can be taken with SMSFs that may not be possible with a public offer superannuation fund. For instance, it is possible for death benefits to be paid as a pension to a death benefits dependant rather than as a lump sum, which means the fund doesn’t need to be wound up. The fund’s investment portfolio can remain intact and the lifespan of the SMSF extended – a benefit not always available with public offer superannuation. Arrangements can also be made to pay a SMSF balance to a specific beneficiary as a pension without giving them access to the capital. However, it is important to make sure the Trust Deed enables the proposed strategy.
Another SMSF benefit is that it can have up to four members, for example parents and two children. Such SMSFs can be a good tool to facilitate intergenerational wealth transfer tax effectively. To achieve this, parents who do not need all of their superannuation can take a pension out of the SMSF and gift it to children, who can then, within contribution limits, recontribute it into the fund in their own name. Such planning can help in a number of situations such as allowing a family business property to remain in a family SMSF even after the death of a key member of the fund.
Another advantage of a SMSF is that death benefits can be paid in-specie, meaning non-cash assets can be transferred direct to a beneficiary. This can be handy for unlisted or liquid assets such as a property, or even listed assets such as shares. However, applicable stamp duty would be payable.