TAKE AWAY POINTS
- If you have a self managed super fund, get advice from an experienced estate planning solicitor ;
- sign a binding death benefit nomination;
- Appoint an attorney;
- Think about who is controlling the SMSF after you die;
- There is no one size fits all solution.
The Issue – on the death of a member of a self managed super fund (SMSF)
Unless steps are taken by a member during their lifetime, the recipient of their superannuation are the Fund’s remaining trustee/s or the member’s executor.
Payment of Super is not directly governed by the terms of a Will.
This can be problematic – particularly in blended families.
Who is entitled to my Super when I die?
Super can only be paid to a superannuation dependant.
A superannuation dependant is:
- immediate family ie. spouse or children; or
- a person who is financially dependent on you (there are special rules about this), or
- your estate via your legal personal representative, that is, the executor named in your Will.
Different tax outcomes apply depending on to whom Super is paid.
How can I have certainty where my Super is paid?
To ensure your Super is paid as you wish – preferably after legal and/or financial advice, you need:
- a signed and dated binding death benefit nomination (BDBN), (there are other similar names depending on the wording of your SMSF deed);
- ideally, that is non lapsing; and
- drafted in accordance with your SMSF deed.
Different rules apply if you receive an account based pension from the Fund.
There is no ‘one size fits all’ solution.
Who will control the SMSF after I die?
Control of a SMSF is important as this person/people/company has to ensure the terms of the BDBN are followed. If this doesn’t happen the legally entitled recipients of Super may end up in Court to retrieve it.
Members of a SMSF are either trustees themselves or directors of a company and the company is the trustee.
- The trustees control and make all the decisions about the SMSF; and
- If the SMSF is a sole member fund, on the death of that member, the deceased member’s executor has to elect the super dependant to receive the member’s super, unless there is a BDBN in place.
- If the SMSF has two or more members, on the death of a member, the surviving trustee/s, with the deceased member’s executor have to elect the super dependant to receive the member’s super, unless there is a BDBN in place.
Case study – Michael and Denise
Recently a legal colleague of mine had a client situation where:
- Husband and wife, let’s call them Michael and Denise, were members and trustees of their self-managed super fund (SMSF).
- Michael had three children from a prior marriage.
- Michael and Denise had two children from their current marriage.
- All children are adults.
- Together, they owned:
- their upper North Shore, Sydney home as joint tenants which reverts to the survivor automatically on the first to die;
- an investment property in inner West of Sydney owned equally as tenants in common. Ownership as tenants in common means, on the first owner to die, their share in the property is gifted by their Will.
- joint bank accounts.
- They each had about $600,000 in their SMSF. Neither had a binding death benefit nomination.
- Denise is independently wealthy from an early inheritance.
Michael died at age 70. In his Will, he appointed Denise as executor and left 50% of his estate to Denise and 50% to his five children equally.
The problem for Michael’s children from his first marriage Grace, Ben and Greta, was that:
- The only asset left to them was a total 30% of Michael’s share in the investment property and a small amount of super.
- All jointly owned assets (other than the Investment property) reverted to their step-mother, Denise.
- Michael hadn’t made a binding death benefit nomination during his lifetime.
- Michael’s Super is, as a result, paid as Denise decides. This is because she has sole control of the SMSF, as remaining trustee and executor.
- Denise decided to pay Michael’s superannuation to his legal personal representative that is, to his estate.
- This means Denise gets half of the Super and Michael’s five adult children share the rest.
- If Michael had a binding death benefit nomination partly or wholly in favour of Grace, Ben and Greta it would have been a better result for them.
- As Denise is likely to leave her estate to her children, Grace, Ben and Greta overall get a raw deal and could have pursued a claim on Michael’s estate but decided not to.
- Some forward planning by Michael would have provided a better result for Grace, Ben and Greta.
This article is general in nature and is not to be relied upon as legal advice.