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Self Managed Super Fund (SMSF) Article
Watch the detail in trust deeds

By Tony Negline.

This article may be out of date.

5th July 2006

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Estate planning has always been an essential part of superannuation.

We know this because for many years super funds have had to exist to pay retirement benefits to members and to pay death benefits to a member’s dependants or estate.

Because super funds are trusts, it is the trust deed, trust law and the super laws which drive who is a dependant and how the death benefits can be paid to them.

The super laws define a dependant to include a member’s spouse (including a defacto), any child (this specifically includes a step-child, adopted child or ex-nuptial child) and anyone who can verify that they are in an interdependency relationship with the a super fund member.

An interdependency relationship exists between two people when they have a close personal relationship, they live together, at least one provides financial and domestic support and personal care to the other person.  There are some exceptions to these requirements when physical, intellectual or psychiatric disabilities exist.  In addition to these issues a range of other matters that must to be considered.

Some super fund trust deeds limit the definition of dependent than what is already allowed by the super laws.  For example perhaps only legally married spouses are dependants.  Maybe only minor children (that is, under 18) are dependants.

Self Managed Super Fund members should check their fund’s trust deed to see what would happen to their benefits if they were to die.  What do they need to do to ensure their wishes are not thwarted by the surviving members?

SMSF trustees should check their fund’s trust deed to see what is expected of them if a member were to die.  To whom would benefits be paid?  How would those benefits be paid?  What are the chances that the trustees’ decisions might be challenged by an aggrieved beneficiary?  What can trustees do to limit the possibility of costly and timely challenges?

Traditionally trust deeds have given trustees total discretion as to whom a death benefit will be paid.  This is designed to allow for complete flexibility.  But with flexibility comes potential danger.

For example, the Connor Family Super Fund has four members, John and Joanne Connor and their two early 20s children, Francis and Michael.  Bill’s account balance is $600,000.  Total assets in the fund are $700,000.  The SMSF owns a life insurance policy on Bill’s life of $500,000.

Nothing has been formally agreed between all the trustees however John and Joanne have had a private conversation about what should happen if John dies.  Joanne will receive a lump sum of $600,000 which will clear all personal debt.  The remaining funds will be used to pay her a pension.

Under current law how death benefits should be paid can have very interesting taxation implications.  Under the government’s proposed super changes announced in the budget the exact taxation impacts on super death benefits is currently unknown.

For the time being assume that half lump sum and half pension is a good way for Joanne to receive John’s death benefits.

Now lets assume that John has just died.  Who decides how his benefit should be paid?  All SMSF members must be trustees and in nearly all funds all trustees have equal voting rights.  It is therefore possible for Francis and Michael to gang up on Joanne and decide that John’s death benefit should be paid differently to Mum and Dad’s unwritten and private agreement.

In the majority of situations this example would be settled exactly in accordance with John  and Joanne’s private conversation.  Francis and Michael and many like them wouldn’t even think about trying to get some of their parent’s money for themselves.

Unfortunately a person’s behaviour can become unpredictable when an unexpected windfall is within easy grasp.  And if there is a dispute how would Joanne prove that their private conversation actually took place?

So how do John and Joanne ensure that upon John’s death there are no nasty surprises?  It is also a good idea to work out what would happen if Bill and Mary died together.

For SMSFs the super laws provide two possibilities.  Not all trust deeds cater for these two possibilities trustees should think carefully before enacting either possibility.  Before a binding nomination is completed a careful review of a person’s Will should take place.

The first binding death benefit nomination can be done by any super fund.  This nomination for some requirements operates like a Will.  It must be signed in from of two adult witnesses who are not nominated as death benefit beneficiaries.

In other requirements, it has its own rules.  These nominations may only last for up to three years unless a member specifically declares otherwise.  A member may only nominate a dependant, that is, a spouse or any child or their deceased estate.

The second type of binding death benefit nomination is unique to SMSFs.  Under the super laws, SMSF trustees may take a direction from a member on how a fund is run.  Under this rule a member would direct a trustee that in the event they died, the death benefit has to be paid to certain people (dependants or estate).  If drafted correctly these nominations do not expire after three years.

Preparing this document can sometimes be tricky and often this type of binding nomination is drafted like a Will.

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