SELF MANAGED SUPERANNUATION FUNDS

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1 SELF MANAGED SUPERANNUATION FUNDS What are Self Managed Superannuation Funds? Self Managed Superannuation Funds (SMSF) are becoming increasingly popular these days to assist with the growth of family wealth. SMSF have been created by legislation under the Superannuation Industry Supervision Act 1993 ( SISA ) and the related Superannuation Industry Supervision Regulations 1994 ( SISR ). A SMSF is a superannuation fund with a maximum of four members. SMSF s are in effect a trust and it is the trust deed that regulates the management of the family wealth within the SMSF for the benefit of family members. The trust deed of a SMSF sets out the rules that work in conjunction with the superannuation laws and trust law to regulate the management of the assets within the funds. Who CAN receive benefits on the death of a member of a SMSF? The table below sets out those who can receive benefits. This is regulated by the Superannuation Law. The possible type of benefits are:- Lump sum death benefits purposes by sub-section 10 (1) of the Superannuation Industry (Supervision) Act (1993); and Death benefit income stream purposes by subregulation 6.21 (2A) of the Superannuation Industry (Supervision) Regulations The following table sets out who can receive benefits from a SMSF. Person Lump Sum Beneficiary Pension Beneficiary Tax on Lump Sum Spouse married Yes Yes No Spouse de facto Yes Yes No Spouse same sex Yes Yes No Child under 18 Yes Yes* No Child 18 to 25 dependant Yes Yes* No Child 18 to 25 not dependant Yes No Yes Child over 25 Yes No Yes Child under significant disability Yes Yes No Interdependent relationship Yes Yes No Legal Personal Representative Yes No Possible * When a pension is paid to a child under age 25 the pension is payable to the child under normal pension provisions but must be commuted and paid out to the child on their 25th birthday.

2 Who WILL receive superannuation benefits on the death of a member of a SMSF? The people who can receive a benefit on the death of a member of a SMSF are limited to the persons listed in the above table. You can make a binding death benefit nomination (see below) which is lodged with the Trustee of the fund. When you die the Trustee must pay the benefit as per that nomination. It is possible to make a non binding nomination (see below) but in this case the Trustee does not have to follow your wishes. You can also ensure the trust deed for a SMSF specifically defines who is to receive those benefits. We can review the deed for you to see if it reflects your wishes and if not we can assist you in amending the deed. Example Steve and Jane have recently married and both have children from a previous relationship. Steve has three children from his first marriage and has significant assets in his SMSF. Similarly Jane has two children from her previous marriage and also has significant assets in her SMSF. Both Steve and Jane wish to make certain that only their own biological children are to benefit form the assets in their SMSF. In order to put their wishes in place it is possible to amend the trust deeds to their SMSF to define the beneficiaries of the fund to be specifically their children. Subject to the notional estate provisions which apply in New South Wales this would mean that the assets held within the SMSF would be protected against any dispute with respect to either Steve or Jane s Will. Putting in place a strategy similar to the above would be extremely effective if the members of a SMSF have either made a non-binding nomination with respect to their death benefits or no valid nomination at all. Types of Death Benefit Nominations There are several options available to the members of SMSF when making a decision regarding who is to receive their superannuation death benefits. These include: 1. No Nomination or Invalid Nominations In this case the member of a SMSF has made no nomination to the trustee of the SMSF at all. In this situation the trustee will have total discretion as to who the benefit is to be paid. In the event that a binding (lapsing) death benefit nomination has expired then the nomination will be invalid and again the trustee of the SMSF will have a total discretion as to whom to pay the benefit. 2. Non-Binding Nominations A Non-Binding Nomination does not bind the trustee to paying benefits to a particular beneficiary. It is completed by a member and signals the intention of the member as to how they would like their superannuation entitlements to be divided. The trustee 1

3 generally has discretion to pay the benefit to either, or both, of the member s legal personal representative or the member s dependants. With this type of nomination, the nomination is to be treated as an expression of the member s wishes only and ultimately the control will rest with the trustee who will be bound by the rules of the trust as contained in the trust deed. 3. Binding (Lapsing) Death Benefit Nominations A Binding Death Benefit Nomination binds the trustee to pay the benefit to the member s nominated beneficiaries. A binding nomination allows a member to nominate multiple beneficiaries and choose payment in the form of either a pension or lump sum. Without a Binding Death Benefit Nomination, there is no obligation to ensure that the deceased s superannuation benefits are paid in accordance with the intentions of the deceased. It also places pressure on the trustee as the discretion of the trustee may be challenged by an affected party in a court. Only superannuation dependants, or the pension s personal legal representative, can be nominated. The definition of superannuation dependants includes your spouse or de facto partner, a child regardless of their age and someone who is financially dependent on you. Binding (Lapsing) Nominations must be witnessed and must be confirmed and updated every three years to be valid. See below for an explanation of a binding nomination that does not lapse at the end of 3 years. These nominations are often used in the case of blended families to ensure superannuation benefits are distributed as intended. As a minimum, the requirements for a binding death nomination should always be considered. They are particularly relevant if the following circumstances apply: In the event of a second marriage and you would like to direct all or part of superannuation benefits to children from a pervious marriage; If you are separated, but not divorced. An estranged spouse may be able to claim your superannuation benefits; You may wish to specifically exclude a particular beneficiary from any claim on your superannuation benefits. 4. Reversionary Nominations Pensions A Reversionary Nomination binds the trustee to continue to pay the member s pension to their reversionary beneficiary on their death. These types of nominations can only be made for one reversionary beneficiary and they must be a dependant at the time of death. They are advantageous where the member desires certainty and wishes to pass their superannuation benefits as an income stream to a beneficiary. Although a reversionary nomination allows certainty, they are not as tax-effective as other nominations. If a member commences a pension and elects reversionary beneficiary, then the deductible amount of the pension is calculated over the longer of either the member s, or their beneficiary s life expectancy. In the case of both Non-Binding Nominations and Binding Death Benefit Nominations, the deductible amount is calculated using the member s life expectancy. 2

4 5. Binding (Non Lapsing) Death Benefit Nominations A unique feature of SMSF is the ability of a member to make a non lapsing binding death benefit nomination. This type of nomination can be put in place by either amending the trustee to the SMSF or alternatively creating a non lapsing binding death benefit nomination document which is allowable under the terms of the trust deed for the SMSF or alternatively passing a resolution at a meeting of the trustees (or directors in the case of a corporate trustee) of a SMSF to accept the binding non lapsing death benefit nomination. What can happen if I do not put in place a Death Benefit Nomination? Case Studies 1. Bill died suddenly and his will left everything to his second wife. The adult children of his first marriage lodged claims with the trustee of Bill s superannuation fund claiming that they were entitled to a share of his superannuation death benefits. The trustee disallowed their claim but the children appealed to the Superannuation Complaints Tribunal. The whole process was taking a long time and Bill s second wife was anxious to finalise the claim and get on with her life. She decided to give in rather than fighting with her late husband s children for years. If Bill had made a binding nomination it would have been binding on the trustee and his children would have not had a claim. 2. Stephan has put in place a Binding Death Benefit Nomination in favour of his wife Sylvia. Stephan and Sylvia have two children, one lives in Melbourne with her husband and children and the other child lives with Stephan and Sylvia as he is still studying and is dependant on his parents. Stephan and Sylvia are both killed in a car accident. Unfortunately there is no Binding Death Benefit Nomination that is effective in these circumstances as Stephan has not made any nomination regarding what happened if Sylvia has died. In these circumstances the trustee of their SMSF will have to decide whether to pay the death benefits to the children direct or to Stephan s estate. If they pay the death benefits direct to the children then their daughter as a non-dependant will pay superannuation death benefits taxes on the amount she receives. (eg. If the taxable amount of the amount she receives is $500,000 then the tax payable is $82,500) The son will receive the whole $500,000 tax free as he is a dependant. If Stephan had put in place a Binding Death Benefit Nomination and a Will with an appropriate adjustments clause then it is likely that no superannuation death benefit tax would be payable. 3. Peter is 58 years old, single and has no partner or children. Peter has significant assets in his SMSF. Peter has been brought up by his mother Jenny as his father Greg walked out on his mother when he was 18 months old. Peter has not seen his father since he was 18 months old. Peter has not made any Binding death benefit Nominations with respect to his superannuation. Peter also does not have a Will. Peter suddenly dies. What happens to his superannuation death benefits. As Peter has no dependants the trustee of his SMSF has no choice other than to pay Peter s superannuation balance to his estate. The end result is that the balance will be shared equally between Peter s parents Greg and Jenny as he did not have as Will. No doubt Greg is delighted and jenny is distraught. If Peter had put in place a Binding Death Benefit Nomination he could have ensured that his superannuation was paid to his mother and any other people he intended to benefit. What type of Death Benefit Nominations suite me? 3

5 If you are looking for absolute certainty then there is no doubt that the way to proceed is to put in place a binding (non lapsing) superannuation death benefit nomination. However it is absolutely crucial that you seek financial advice from your accountant or financial planner before making a decision regarding your Death Benefit Nominations as there are significant taxation implications if you get it wrong. The review of your superannuation death benefit nomination is a crucial area of your overall estate planning. Once you have obtained this financial advice we can prepare the legal documentation to put in place your decision. If you have any queries regarding this material please ring any of our offices below CROWN STREET, WOLLONGONG PO BOX 105 WOLLONGONG 2520 DX WOLLONGONG COURT PH: (02) FAX: (02) COLLINS STREET, KIAMA PO BOX 95 KIAMA 2533 DX 5188 WOLLONGONG PH: (02) FAX: (02) A PRINCES HIGHWAY, DAPTO PO BOX 105 WOLLONGONG 2520 DX WOLLONGONG COURT PH: (02) FAX: (02) KINGHORN STREET, NOWRA PO BOX 162 NOWRA 2541 DX 5301 NOWRA PH: (02) FAX: (02) BONG BONG STREET, BOWRAL PO BOX 438 BOWRAL 2576 DX 4969 BOWRAL PH: (02) FAX: (02) rmb@rmblawyers.com.au WEB: This material is provided by RMB Lawyers to our clients for their information on a complimentary basis. It represents a brief summary of the law applicable to Wills as at June 2011 and should not be relied upon as a definite or complete statement of the law. 4