Why is Estate Planning important when you have a Self-Managed Superannuation Fund?

In Australia, around 25% of people hold their superannuation in a Self-Managed Superannuation Fund (‘SMSF’). A SMSF is a private super fund established by accountants and/or lawyers for clients who wish to have control over their own retirement savings.

SMSFs are essentially a type of trust that is established by a Trust Deed and are heavily regulated by the Australian Taxation Office.

When you are a member of a SMSF, it is crucial that you keep your estate planning, including your Will and Enduring Power of Attorney, up to date. There are numerous reported cases in Australia as to how things can go wrong if sufficient thought isn’t put into estate planning in relation to your SMSF.

Many individuals do not know that SMSF member balances do not automatically form part of their estate to get paid pursuant to the terms of their Will. To whom your superannuation death benefit will be paid to, and in what amounts, will be decided by your SMSF Trustee, unless appropriate planning is in place.

A SMSF trustee is an individual and/or company who controls and administers the SMSF in accordance with the SMSF's trust deed. The SMSF trustee will have the decision of who the death benefit is paid to upon a member’s passing unless a Binding Death Benefit Nomination (‘BDBN’) has been validly executed.

It is critical that thought is given by those who have SMSFs as to who will be the trustee of their SMSF if they were to lose capacity to make decisions regarding the SMSF or if they were to pass away. This role is important to ensure the ‘control’ of the SMSF does not fall into the wrong hands. It also important to seek legal advice as to the role of Appointor in any SMSF because the Appointor is the ‘head of the trust’ and can fire and/or hire new trustee at any time.

Experienced lawyers should be engaged for the review of SMSF trust deeds and the succession of the role of Trustee and/or Appointor as any appointment of succession must be in accordance with relevant legislation including the Income Tax Assessment Act 1997 (Cth) and Superannuation Industry (Supervision) Act 1993 (Ch). If it is not, the SMSF may not be compliant and significant penalties can apply.

Members of a SMSF also need to ensure that they have a valid BDBN in place. Whilst in some circumstances it might be appropriate to allow a SMSF trustee to use discretion as to who the death benefit is to be paid to, many will wish to decide who their death benefit is paid to upon their passing.  A BDBN ensures the trustee must make payment of the death benefit in accordance with the BDBN, as opposed to at their full discretion.

The landmark case of Katz v Grossman [2015] NSWSC 934 is a prime example of when SMSF estate planning is critical. In this case, the deceased died with two adult children surviving them and to whom he wished to treat equally upon his passing. During the deceased’s lifetime, he made a non-binding death benefit nomination stating that he wished for his SMSF trustee to pay his death benefit equally between his two children. However, thought had not been put into who the SMSF trustee would be upon his death.

In the absence of a BDBN, the SMSF trustee, who in this case was the deceased’s daughter, had the sole discretion to decide to whom the $1 million death benefit was paid to. The daughter as SMSF trustee paid the entire benefit to herself, disregarding her father’s non-binding death benefit nomination and wishes. The son of the deceased contested the SMSF trustee’s decision however, the Court found that as the daughter was the SMSF trustee and no BDBN was in place, she had the legal discretion to make payment to herself in full.

Through the careful review of your Will, Enduring Power of Attorney and SMSF, our experienced lawyers can ensure that the necessary thought has been put into your estate planning needs and wishes.

If you are a member of a SMSF and would like to discuss the succession planning relating to your fund, we invite you to book an appointment with one of our experienced estate planning lawyers at either our Drouin or Warragul office, or head to our website and book an appointment online!