As SMSF professionals, we are often asked about the many benefits of using a self-managed superannuation fund to plan your retirement savings. Of the many benefits, one important aspect that is commonly overlooked is the estate planning abilities an SMSF can offer.

This article looks at the different mechanisms available within an SMSF for effective estate planning, and the consequences thereof post the introduction of the Transfer Balance Cap.

The death of an SMSF member triggers an automatic cashing event, so trustees need to give thought to the effect that may have on a potentially long list of recipients.

Estate planning

Estate planning: Reversionary pensions

At the pension commencement time, a member can elect to name a reversionary beneficiary. The reversion is taken to have occurred at the member’s date of death, the recipient records a separate pension interest for the total amount of the deceased pension at the time of death.

A reversionary pension provides a straight forward administration solution in the event of the death of a member, particularly as that point in time can be a difficult one for families. However, consideration now needs to be given to the Transfer Balance Cap ($1.6M) that came into place from July 1st, 2017. An automatic pension reversion post July 1st, 2017 now has the very real consequence of causing the surviving member to exceed their transfer balance cap (TBC).

It is important to note the following two key points relating to the treatment of the reversionary pensioners transfer balance cap.

  • The value of the deceased members pension account will be the amount that is credited towards the reversionary pensioners TBC
  • The TBC credit will not apply until twelve months after the date of the deceased member.

These two points are crucial for the reversionary pensioner to ascertain if there may be a potential excess transfer balance cap issue, and effectively allows them 12 months to act.

Binding Death Benefit Nomination (BDBN)

As the name suggests, the BDBN legally binds the trustee to pay the deceased benefits in accordance with their nomination. The BDBN allows greater flexibility than a reversionary pension because the members have scope to name a greater number of beneficiaries (if permitted beneficiary under the superannuation laws).

The Superannuation Industry (Supervision) Act 1994 does not provide for details to the operation of a validly executed BDBN for SMSFs, therefore the funds trust deed contains exclusive details for trustees to follow in the event of use. It is wise for trustees to review their BDBNs whenever the trust deed is updated to ensure the terms contained within the updated deed allow the BDBN.

Terms of your will

Superannuation interests are regarded as non-estate assets and therefore are not subject to the terms of your will.

It is possible for a member’s superannuation interest to be directed to their estate by naming their Legal Personal Representative as beneficiary on their validly executed Binding Death Benefit Nomination Form.

Members should note that once their superannuation interest is paid to their estate, it is pooled with their other estate assets, which may be subject to dispute or challenged by potential beneficiaries.

Trust Deeds

The importance of the fund’s trust deed is paramount in the application and treatment of member death benefits and an understanding of your deeds contents is critical. Depending on the age of your deed, it may contain clauses that are more restrictive than current legislation allows or may exclude the trustee from implementing certain strategies (i.e. reversionary pensions).

Given the introduction of the transfer balance cap regime, it is strongly suggested SMSF trustees review their deeds to ensure flexibility with the excess transfer balance caps, death benefit rollovers, and reversionary pensions.

The introduction of the Transfer Balance Account regime has potentially jeopardised some well-made estate plans. The limit of $1.6M in retirement phase now means there is a very real possibility for some death benefit payments to be forced out of the concessionally-taxed superannuation environment.

We urge all Super fund trustees who may be impacted by the transfer balance cap to consult their financial adviser or estate planner for advice.

Shane Kennealy is Senior SMSF Accountant at Peak Super. To learn more about the role that SMSFs can play in estate planning, contact Shane here.