Mar 16, 2023 / News

Superannuation

Estate Planning in SMSFs

A person’s superannuation balance is often one of their largest assets. There are a number of matters relating to superannuation that should be addressed in any estate planning. In an SMSF, these include the potential problem of an individual trustee or director of the trustee company losing legal capacity, and the benefits of putting in place binding death benefit nominations and enduring powers of attorney.

Except for single member funds, the general rule in SMSFs is that all members must be trustees or directors of the corporate trustee, and all trustees or directors of the corporate trustee must be members. In a single member fund, there must be a second individual trustee or director of the corporate trusts who is not a member. Failure to meet these requirements will eventually result in the fund being non-complying.

One of the most significant reasons for setting up an SMSF is usually the opportunity for members to directly control the fund’s investment activities. Unfortunately, this direct control also means that an SMSF is immediately affected if a member loses legal capacity. 

A person can lose legal capacity due to accident or illness, including dementia. This means they are no longer able to carry out their responsibilities as a trustee or trustee director and would normally have to leave the fund.

Fortunately, the rules provide that if the member has appointed an attorney under an enduring power of attorney, the attorney can become a trustee or director of the corporate trustee in place of the member without endangering the fund’s complying status. An enduring power of attorney is specifically needed because it will continue to operate after the person granting the power of attorney loses legal capacity, while a normal power of attorney ceases to operate in those circumstances. It is even possible for the enduring power of attorney to be executed in favour of multiple attorneys, so that one or more of those attorneys can be appointed as trustee or director of the corporate trustee in place of the member.

But to be effective, the enduring power of attorney must be put in place before the loss of capacity. This is a step to be taken when planning for a future problem, not once the problem has been encountered. In the event of legal incapacity where no enduring power to attorney is in place, rolling out the member’s balance might involve the fund in the unplanned disposal of assets and possibly a liability to capital gains tax. One possible alternative is to apply to a state tribunal for the appointment of an administrator who can be appointed as a trustee of the fund, but this involves time and legal costs, and there is no guarantee the tribunal will agree with the other fund members on who to appoint as an administrator.

The choice of the attorney under an enduring power of attorney is itself an important decision, as the person nominated could potentially become a trustee of the SMSF. 

Binding death benefit nominations are another useful tool in estate planning. A binding death benefit nomination is used to direct a member’s super death benefits to specified beneficiaries instead of the trustee having a discretion in paying the benefits. A recent court case determined that in an SMSF binding death benefit nominations don’t need to be renewed every three years, but it is important that nominations comply with the terms of the fund’s trust deed. It is also important to seek professional advice in preparing binding death benefit nominations, as the law allows super benefits to be paid to only a limited group of people, and the tax consequences for beneficiaries should also be considered.

Enduring powers of attorney and binding death benefit nominations should be reviewed regularly in line with all estate planning measures, as super and tax laws change frequently, and decisions made some years ago might no longer be appropriate. 
Please contact your Nexia advisor if you wish to investigate further the use of these important estate planning tools in your SMSF.

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.