10 things to know about estate planning in SMSFs

Estate planning involves making sure your family’s finances will be in good shape if you die or become incapacitated.

And how a few steps can make a big difference in tax bills.

However unpleasant it might be to contemplate, death is one of life’s realities, which makes estate planning an important consideration when it comes to self-managed superannuation funds (SMSFs).Often people want to know about how and when benefits are paid as well as the tax that might apply to these benefits.

Read on for 10 estate planning tips for SMSFs:

1.    Estate planning isn’t only about death

Estate planning technically involves making sure your family’s finances will be in good shape if you die or are incapacitated in some way — either temporarily or permanently disabled —and unable to work.

While this article focuses on death benefits, planning for different types of disability is vital.

2.    Super is not part of your will

In the first instance, your super benefits don’t automatically form part of your estate. This can mean that your benefits might be paid out before probate is granted on your estate. This aspect can be important to make sure your family isn’t worse off financially. Getting probate can sometimes be time-consuming and complex.

Your super can be paid to your estate. You just need to know how to make this happen.

3.    Your super fund’s trust deed is paramount

The key to knowing how your death benefits will be paid is governed by your SMSF’s trust deed. You must carefully review this document and operate within its rules.

The more explicit the trust deed is, the less likely that disgruntled survivors can challenge who is going to receive your death benefit.

4.    Pay attention to super fund laws and death benefits

Apart from your estate, the laws allow an SMSF to pay a death benefit to a spouse, a child (this includes a biological, adopted, step- or surrogate child) or any person with whom you’re in an inter-dependency relationship.

Your SMSF trust deed can specify fewer people than this list of potential beneficiaries but it can’t allow a wider range.

5.    Determine whether inter-dependency relationships are involved

An inter-dependency relationship is said to exist when certain attributes about your relationship can be established, including:
•    Close personal relationship
•    Cohabitation
•    One or both of you provides the other person with financial support
•    One or both provides the other person with domestic support and personal care

Overall, this definition is quite complex and should only be used with the assistance of someone who has experience with superannuation and estate planning laws.

In many cases your adult children, including those not working full time but still living with you, will not satisfy this definition.

6.    Pay attention to death benefit recipients
There is a fair amount of flexibility here. You could leave the payment — and how the benefit is paid — to your SMSF’s surviving trustees to determine. Over the years this has been the traditional approach, which has served many people very well.

Sometimes super fund members have completed a beneficiary nomination that provides guidance to the trustee. There’s nothing in these nominations that force a trustee to pay a benefit in a particular way.

With the many varied and complicated family relationships that have emerged over the last 40 years, the need for greater certainty has arisen. This is where binding death benefit nominations come in.

Binding nominations first appeared about 10 years ago and are now quite popular. Most SMSF trust deeds permit them.

Sometimes these nominations are challenged after death by aggrieved relatives. Two common arguments are that the binding nomination was completed incorrectly or the deceased completed a binding nomination that wasn’t permitted by the SMSF’s trust deed.
Get advice to make sure the right nomination is completed for your particular circumstances.

7.    Note tax concessions on superannuation death benefits
Super benefits are split between taxable and tax-free components.

The tax-free component is basically all contributions you’ve made to super that haven’t been claimed as tax deductions or haven’t been made by an employer. The taxable component is the balance of the super account.

In all cases the tax-free component will be paid tax-free to your beneficiaries.
The taxable component will be tax-free if paid to your dependants for income tax purposes.

8.    Determine who your tax dependants are
Tax dependants are essentially a spouse, former spouse, child under 18, or anyone with whom you were in an inter-dependency relationship (see above) just prior to death. Also included here are adult children who are dependent on you because of a particular mental or physical disability.

Clearly, mentally able and able-bodied adult children aren’t dependants for super death benefit purposes but they may be in an inter-dependency relationship.

9.    Maximise the tax-free status of your super fund death benefit
This is best explained by an example. Suppose you have A$1.2 million in super which is all a taxable component. You’re aged 63. Your spouse is 62 and has no super assets in their name. You both agree that an important consideration is the amount of tax your surviving adult childrenmight pay on you and your spouse’s death.

At present your adult independent children would have to pay almost A$200,000 tax on a A$1.2 million death benefit (that is 16.5 per cent tax).

The obvious question is: should you take A$450,000 out of your super benefits now and contribute it in your spouse’s name as a non-concessional contribution and then perform a similar transaction in your own name at a later date?

These contributions will only be possible while you’re under 65 and you have no excess non-concessional contribution issues to worry about. To have this money taken out of your super you’d need to be fully retired.

Once you take the money out of your super and make the non-concessional contribution for your spouse, it will become a 100 per cent tax-free benefit that can be used to provide a pension. Once the pension commences, it will remain 100 per cent tax-free for the remainder of your spouse’s life. This will include death benefit payments.

After the withdrawal and re-contribution strategy for your SMSF, the super benefits will be A$450,000 tax-free component and A$300,000 taxable component.  The tax-free component now represents 60 per cent of your super balance. In total, 75 per cent of your and your spouse’s super assets are now tax-free.

Tax on death is now down to A$49,5000, which is a significant saving for completing a few relatively straightforward transactions.

10.    Plan regular reviews
As your life changes – birth, death, marriage, divorce, major asset purchase, children becoming adults and so on – so should your estate plan, which includes how your SMSF benefits will be paid out. Schedule regular reviews and update as required.

December/January 2022
December/January 2022

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