Check trust deed to protect super in estate planning
For many people, their superannuation is their biggest asset when they retire – and often when they die as well.
Despite this, there are still a number of misunderstandings about what steps need to be taken to manage and direct super, as part of estate planning, to ensure it goes to the intended person. This is particularly true of SMSFs.
Perhaps the biggest misconception in estate planning is that super benefits automatically form part of an estate. However, this is not the case and super cannot be directed to beneficiaries via a will unless other supporting documentation is in place and it is allowed by the relevant trust deed.
Instead, if no valid directions have been provided, the trustee of a super fund – whether an SMSF or a public offer fund – is responsible for the distribution of death benefits.
SMSF members can leave instructions for trustees on how they want their super benefits to be distributed, so long as this is permitted by their trust deed. Each deed can be unique in characteristics and terms so it is vital to ensure the original documentation is reviewed whenever dealing with an SMSF.
There are two main ways for SMSF members to direct super funds as part of estate planning.
One is to have a binding death benefit nomination (BDBN) as part of the SMSF trust deed that names a valid beneficiary.
A BDBN is an election made by a member that is binding on the trustee and means the trustee must direct any benefits remaining in a member’s super account in the way the member has instructed.
However, there are strict rules around BDBNs. They must comply with the requirements of the fund’s trust deed to be effective, and not all trust deeds permit BDBNs, so it can’t be assumed any BDBN is valid.
If the trust deed does allow BDBNs, there are usually a number of requirements that must be met to ensure they are valid.
Legislation requires BDBNs to:
- be in writing,
- be signed and dated by the member in the presence of two adult witnesses, and
- contain a declaration, signed and dated by the witnesses, that the member signed the notice in their presence.
Other requirements that may be included, depending on the trust deed, are that the BDBN:
- may lapse after a time period (usually three years) or is non-lapsing,
- can be revoked by the member at any time, via written notice to the trustee, and
- must contain enough detail to identify the member and/or beneficiaries.
There may also be less common provisions, such as:
- restrictions on the way in which a trust deed can be amended if that amendment impacts on the BDBN,
- requiring the trustee to consider and accept a BDBN before it is valid,
- specifying the form the BDBN should take, which sets out the percentage entitlement of each beneficiary and specifies who can be accepted as eligible beneficiaries, and
- empowering the trustee to accept amended BDBNs from the financial attorney of a member – it is commonly accepted that a trustee should accept a BDBN that simply renews an existing BDBN, the difference here is that the trustee may allow a financial attorney to change the original intention of the member.
One key issue to be aware of is that BDBNs may automatically lapse after three years. If this happens, then the SMSF’s trustees will decide who receives the death benefits and it may not necessarily be the person the deceased had chosen.
It is possible to have a non-lapsing BDBN, which, as the name suggests, will not expire.
It’s worth checking the trust deed of the fund to check whether BDBNs are allowed and, if so, what form they may take.
The other way to direct super benefits as part of estate planning is to set up a testamentary trust. This is a trust that comes into effect on a person’s death, with the SMSF’s BDBN directing death benefits into the trust.
This then means the super funds become part of the estate and can be directed to beneficiaries through a will.
This approach has a number of advantages, including tax effectiveness and the ability to protect assets.
The tax treatment of the benefits depends on who the beneficiaries are. If they are dependants for tax purposes (such as a spouse or child under 18), then it will be tax-free.
For others, the benefit will be taxed according to inpidual circumstances. There are options for structuring the will and the trust so that some components of the benefit are tax-free, and also to segregate super entitlements for the benefit of the death benefit dependants only (commonly referred to as a super proceeds trust).
Whichever approach is taken, it is important to ensure there is appropriate documentation and records to accompany any directions, and that the directions are allowable under the SMSF’s trust deed.
A good first step is to check the trust deed and fully understand what is permitted and what directions are already in place. Don’t assume the trust deed reflects your wishes, unless you have taken steps to make sure this is the case.
28 May 2018
By Anna Hacker
Anna Hacker is estate planning national manager at Australian Unity Trustees.
www.smsfmagazine.com.au
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
- Millions of Australians lose by leaving savings in default MySuper funds
- Vanguard economic and market outlook for 2024: A return to sound money
- An investment year of ups and downs
- How to tame the market's skewness
- The Countries that Export the Most Wine in the World
- Tips for preparing for the best tax outcomes
Article archive
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
April - June 2018 archive
- Assess your retirement financial resources
- Cryptocurrency audits tipped to increase this EOFY
- Time to check your risk exposure?
- Some general interest stats on SMSFs
- Survey reveals strong opposition to retirement system changes
- Check trust deed to protect super in estate planning
- Australia by numbers – Update
- Federal Budget 2018 – Overview
- Your Budget
- 4 components of our 2018 Federal Budget
- Tools to help you manage your financial position are available on our site.
- New rules capture SMSFs trading big with cryptocurrency
- Common EOFY slip-ups flagged for SMSFs
- Beware residency rules if moving overseas
- 99 pct of SMSFs missing global opportunities
- How to plan for a better retirement
- Australia by numbers - Update
- Determine your retirement goals
- ATO issues update on cryptocurrency compliance traps
- How likely is a global trade war?
- Gig economy spike prompts calls for super policy changes
- Australia's vital statistics
- What your age should say about your super
- Downsizing requires holistic tax planning
- Millions of multiple super accounts erode savings