SMSF funds long ago ceased to be the exclusive preserve of the elite.
Superannuation is now an important part of all wealth-building and retirement strategies. For many business owners, farmers, executives and professionals, the ‘do-it-yourself’, ‘private’ or ‘Self Managed’ super fund (‘SMSF’) now sits alongside the ‘family trust’ as a key investment structure.
When we ask people why they bother to set up a SMSF fund, the most common answer is that they want to have more control over their retirement savings. When referring to ‘control’, they are invariably referring to control over the type of investments they make – they are talking about control over how they build wealth within super. For example, they may wish to buy a business property, or invest in particular shares.
However, what is less appreciated is the potential loss of control over how your wealth within your fund will pass to the next generation. Often, too little attention is paid to issues associated with passing control of the fund, and how the wealth is going to ultimately come out of the fund. This includes a consideration of:
- Who should be the trustees of the fund before and after your death;
- The correct ‘reversionary’ terms of pensions paid (or to be paid) by the fund; and
- The structure of ‘death benefits’ to come out of the fund.
Not only is there a real practical risk of losing control of the wealth within your fund, but you may also lose access to tax benefits through lack of appropriate super succession planning.
Consider the following facts:
- You do not have complete ownership of the assets in your super account. This is because a super fund is a ‘trust’. In the absence of an effective binding nomination, the trustee has wide discretion as to who gets your super entitlement on your death. This applies to both public funds and private SMSF funds. You should ensure that you have given a valid binding direction to your trustee. If you have a SMSF fund, you should also ensure that the Fund Deed provides for such binding nominations. Binding nominations are not just for public super funds, they are equally relevant to private SMSF funds.
- You generally cannot specify who will get your super entitlements in your Will. This is because your super entitlement does not form part of your ‘personal estate’. It may be possible to have your super entitlement paid to your executor on your death, and then dealt with through your Will – but this is not the default position. Furthermore, this may not produce the best tax outcomes for your beneficiaries. You need to specifically address this issue.
- It is common for SMSF funds to have either family members as individual trustees, or a company trustee, with member directors. If you are an individual trustee, you cease to be a trustee on your death. Your executor is not necessarily appointed as a replacement trustee. Accordingly, on your death the remaining trustees may gain control of your super entitlements. If you have not given them a binding direction as to where to pay your entitlement, they can pay the benefit to who they like. This may not be a problem if the other sole trustee is your spouse – and you intend for your spouse to have the entitlement. However, problems do arise when there is a spouse and two children as trustees. Problems also arise when control over a “$2 company” trustee passes to an unintended beneficiaries (for example children), who then effectively gain control of the super entitlements – at the expense of your spouse.
- One of the biggest assets in a super fund at the time of your death may be the proceeds from a life insurance policy. Life policies are often held in a super fund because the funding of the premiums becomes effectively tax deductible (by way of the treatment of certain contributions to fund the premiums). You need to consider for the tax treatment of life policy proceeds, and the tax consequences of paying the proceeds from the fund.
- If you are receiving a pension from your fund you need to carefully plan the terms of the pension to ensure that the pension, or the assets supporting the pension, revert or commute to the appropriate person – both for commercial and tax purposes.
Taking a proactive approach to superannuation planning, in conjunction with wider Personal Estate and Business Succession Planning, can yield significant commercial and tax benefits both while you are alive, and for your beneficiaries when you die.
WARNING & REPUBLISHING
This publication contains general information only, and is not to be construed as legal advice. Laws differs in each jurisdiction in Australia, and may be interpreted or applied differently depending on your location. This publication is not to be used as a substitute for legal advice tailored to your individual situation. Use of this publication does not create or constitute a solicitor-client relationship between Andreyev Lawyers and any user of this publication.