Article 1 | Have you considered what you will do if an unexpected event occurs?
Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member. It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF?
Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.
Death
Think about where you want your superannuation to go on your death. Given the introduction of the $1.6 million transfer balance cap which means larger sums of money may need to leave the superannuation system sooner, planning has never been more important. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries. The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member as well as how death benefits are to be handled by you and your fund.
A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements. Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.
You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming.
A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate-planning of its members.
Diminished capacity
Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF.
Member leaves
How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset, or introduce a new fund member to allow the exiting member to transfer out of the fund.
Separating couple
Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, so specialist advice may be needed.
Reviewing your insurance
SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.
In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.
Administration of your SMSF
If an unexpected event happens you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members. As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).
How can we help?
If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give me a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.
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Article 2 | It’s Always Been a Matter of Testamentary Trust
If I had a dollar for every time a client comes in to discuss their estate plan and says “I was at a barbeque on the weekend and a mate said I should have something called a testamentary trust …”, I could probably pay for my 4th child’s private school fees (or at least cover the cost of my weekly coffee intake). My response almost always is, “Well, your mate is one smart cookie.”
What is testamentary trust?
A trust is a legal relationship where there is a legal owner of property (the ‘trustee’) who holds certain assets (the ‘trust property’) for the benefit of others (the ‘beneficiaries’), pursuant to certain rules (the ‘trust deed’).
A testamentary trust is simply a trust established pursuant to a will to hold an inheritance for certain nominated beneficiaries, and a broad range of potential beneficiaries (such as lineal descendants, a wider class of relatives, and associated entities). Most testamentary trusts are similar to ‘normal’ discretionary trusts established during a person’s lifetime, with extensive powers and unfettered discretions given to the trustees to invest and manage the trust fund and distribute income and capital. The will itself sets out the terms of the trust and becomes the trust deed.
What are the benefits of a testamentary trust?
Appropriately structured testamentary trusts can achieve numerous objectives, such as:
Significant tax planning opportunities by being able to distribute income and capital amongst a range of possible beneficiaries, and in particular access concessional tax treatment of distributions of income to beneficiaries under the age of 18.
Safeguarding inherited assets from creditors and trustees in bankruptcy. This can be a particularly important advantage where potential beneficiaries are company directors, business owners or professionals.
Increased protection of an inheritance from attack by the Family Court in the event of a beneficiary’s relationship breakdown.
Protecting accumulated wealth from spendthrift beneficiaries – sometimes you need to protect an ‘at risk’ beneficiary from themselves;
Providing for infant children and vulnerable or disabled beneficiaries;
Creating a legacy for future generations. The trust could potentially operate for up to 80 years from death.
There is no ‘one size fits all’ when it comes to testamentary trusts, and the appropriate strategy and structure of the testamentary trust should be tailored to achieve your particular objectives.
If this article has raised questions for you, the team at Bentleys Wealth can help.
*A Matter of Trust was the second hit single on Billy Joel’s 1986 album The Bridge
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
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Article 3 | Binding Death Benefit Nominations and Reversionary Pensions – new considerations post super changes
When was the last time you reviewed your Binding Death Benefit Nominations (BDBN) and Automatically Reversionary Pensions (ARP) as a part of your larger estate planning goals? One of the major changes to occur in the super landscape in the last 12 month has been the introduction of the Transfer Balance Cap (TBC). As a result of this, many SMSF retirees have had to commute Pension balances in excess of $1.6 million and now have Accumulation benefits in their fund for the first time in years. What does this mean for your estate plan?
An ARP can only be used to nominate who receives your Pension Benefits upon death. A BDBN can be used to cover both your Pension and Accumulation Benefits. It is the industries view that an ARP supersedes a BDBN.
If a member has only had an ARP to their spouse historically (when all of their Benefits were in Pension phase), they will now have to consider a BDBN to cover their Accumulation Benefits from 1 July 2017.
Depending on who they’d like to nominate, they may wish to remove their Reversionary Pension Beneficiary and replace it with a BDBN. A BDBN can allow more freedom in who can be nominated – dependents (including adult children) or your estate.
If you already have a BDBN in place, there are a couple things worth checking:
– Is an eligible dependent on your estate (legal personal representative) nominated?
– Is it lapsing or non-lapsing?
– Has it been executed correctly, meaning witnessed by someone who isn’t nominated themselves?
As you can now tell, there are a number of things to be considered and the above will form part of your overall estate planning strategy going forward. If you’d like to review your current arrangements please get in touch with your advisor.
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Article 4 | It’s always been a matter of Testamentary Trust
Over the page, I introduced you to the concept of testamentary trusts. In its most common form, a testamentary trust is simply a discretionary trust established pursuant to a will to hold an inheritance for certain nominated beneficiaries, and a broad range of potential beneficiaries.
This month let’s take that concept one step further, and talk about Superannuation Proceeds Trusts (SPTs). A SPT is simply a trust established by will or by deed solely to receive superannuation proceeds on the death of a fund member.
Why establish a separate SPT?
If superannuation proceeds are received into a testamentary trust of which the potential beneficiaries most likely to benefit are a mix of death benefit (tax) dependants and non-tax dependants, tax will be payable on the taxable component of the death benefits.
Whereas, if the death benefits are received into a SPT ultimately for the benefit of tax dependants only (e.g. a spouse and young children), the superannuation proceeds can be received into the tax effective and protective environment of the SPT tax-free.
Can you establish a SPT after death?
In limited circumstances, a SPT can be established after the death of a member, even where the deceased member has not incorporated a SPT into their will.
However, difficulties can arise if the superannuation fund trustee does not have discretion to pay superannuation proceeds to a SPT under their trust deed. Often there is no clear pathway to allow the trustee of a superannuation fund to distribute to a SPT unless the SPT has been established under a deceased’s will.
What can you do to ensure the SPT is effective?
It is important to ensure that appropriate nominations are in place to direct superannuation death benefits to the legal personal representative for distribution under the will, and if appropriate, to a separate SPT. Our wills incorporate a special clause to ‘quarantine’ superannuation proceeds for the benefit of tax dependents in a sub-trust of any testamentary trust created, ensuring that concessional tax treatment status is maintained. As always, ‘one size does not fit all’ and you should discuss the appropriate structure and strategy with your trusted legal adviser.
If this article has raised questions for you, the team at Partners Legal can help.
*A Matter of Trust was the second hit single on Billy Joel’s 1986 album The Bridge.
