Superannuation and estate planning: The golden rules

Planning for what happens to a member's superannuation benefits on death (death benefits) is essential. A properly prepared SMSF deed is an integral part of this planning, but so is:

• understanding that deed and the mechanisms it provides for death benefits, and how to use those mechanisms properly; and
• ensuring death benefits planning forms part of a comprehensive estate plan.

This article touches on some of the golden rules to observe when undertaking this planning, and highlights some of the implications if this goes wrong.

What are the golden rules of superannuation and estate planning?

Planning for treatment of death benefits should form part of every person's estate plan. That planning can be quite involved, and requires analysis and preparation of a range of key documents. This article highlights some of the essential planning rules and objectives relevant to that process.

Super is not an asset of your estate

A member's death benefits do not form part of their personal estate. Payment of a member's death benefits is determined in accordance with the provisions of superannuation law and the SMSF's governing rules. The member's will is only relevant if:

• the provisions of superannuation law or the SMSF's governing rules require the SMSF trustee to distribute the death benefits to the member's estate; or
• those provisions permit the SMSF trustee to distribute the death benefits to the estate and the trustee exercises its discretion to do so.

This golden rule was stated plainly by the Superannuation Complaints Tribunal, and reiterated on appeal to the Federal Court of Australia in the decision of Mandie, that 'superannuation is not an asset of the estate and a trustee is not bound to follow the directions of a will. Even if superannuation is specifically mentioned in a will, it does not make it an asset subject to the terms of the will.' ^[1] You can read more about the decision in Mandie.

Okay, how do you make super an asset of your estate?

The legislation requires death benefits be paid to the member's dependants (spouse, children, other dependants) or 'legal personal representative' (ie. the executors of the deceased member's estate).

Accordingly, death benefits can be dealt with by the SMSF trustee:

• paying them directly to dependants;
• paying them to the member's legal personal representative (ie. the executors); or
• using a combination of both.

Those death benefits paid to the estate will then be administered in accordance with the member's will.

Careful drafting is essential

There are a variety of means by which a member can give directions to the SMSF trustee about death benefits. These include:

• a binding death benefit nomination;
• a death benefit agreement (which essentially becomes part of the SMSF's deed); and
• the terms of any pension, if they require the continued payment of a pension on the member's death to one of the member's eligible dependants.

Accordingly, another golden rule is that death benefits planning documents must be carefully drafted given the range of different options and the need to ensure they all work as intended under the SMSF deed.

Another recent decision (which you can read about: see Munro v Munro ^[2] ) is an important reminder to carefully draft these documents. That decision highlights that:

• a valid nomination under superannuation law must be to eligible 'dependants' or to the member's legal personal representative; and
• a nomination will be invalid if it refers to paying the death benefits to 'the trustee of the deceased estate' rather than to the 'legal personal representative'.

The decisions in Mandie and Munro highlight that:

• estate planning and superannuation documents are vulnerable to fail where they are not properly drafted; and
• particularly where the member’s circumstances change but they fail to revise their directions in respect of death benefits, a member's estate planning objectives will not be met by a will alone.

Control of fund and planning for transition is crucial

If care is not taken to select a suitable person as successor to a deceased member in the role of:

• individual trustee; or
• director of the corporate trustee (and the shareholder who appoints them),

then situations can arise where the SMSF is under the control of an unintended successor. That person might act in accordance with superannuation law and the SMSF deed but contrary to the wishes of the deceased member.

If member 1 has complete trust that member 2 will do all that is required to deal with the death benefits in an appropriate way, there may be no need to create any binding arrangements in respect of death benefits. Each member may be content to allow the survivor to exercise their discretion, obtain the right advice and make the correct decisions.

However all members should take the time to consider their circumstances, and the best approach. For instance the member should consider putting in place binding arrangements for the payment of their death benefits (and thereby remove the trustee's discretion):

• if the member has reservations about how the survivor will exercise their discretion; or
• if the member considers that the survivor may be vulnerable to manipulation, or has reservations about how the survivor's legal personal representatives (who would be required to act if the survivor has lost capacity) would exercise their discretion.

Specific considerations for individual trustees

Arrangements for control after a member's death is somewhat complex in the case of an SMSF with individual trustees and these require careful thought.

Depending on:

• whether the member has left the trustee significant discretion (which may lead them to ensure control passes as they intend); and
• whether the member has put in place arrangements in respect of death benefits that are binding on the remaining trustees,

arrangements may be made for the member's legal personal representative (ie. executor of their estate) to be appointed as trustee in place of a deceasedmember.

Corporate trustees

If control is a concern in the case of an SMSF with a corporate trustee, it is essential that part of the plan includes deciding who will hold the shares in the corporate trustee. This is because the shareholders have the power to appoint directors.

There is no restriction on who should be the shareholders of the corporation. Accordingly, and again depending on the extent to which the member wishes to manage control of the SMSF and its trustee after their death, arrangements for ownership of the shares in the corporate trustee should form part of the member's estate plan.

Planning is an ongoing responsibility

Reviewing a member's plans at different life stages is just as important for SMSF death benefits as it is for the member's broader estate plan. The critical stages where the member's plans should be reviewed include:

• marriage or commencement of de facto relationships;
• divorce or the end of a de facto relationship;
• when families blend;
• when a spouse dies; and
• on commencing the pension phase.

For example, on the death of a spouse, the surviving spouse should revisit reversionary beneficiary arrangements and consider whether, and the extent to which, death benefits will be dealt with under the member's will.

Reviewing a member's plans on commencement of the pension phase is also important because once the pension phase commences, the payment of those benefits in the event of death will be governed in the following order:

• according to the pension agreement — are there any arrangements for payment of the pension to a reversionary beneficiary;
• according to any valid death benefit agreements;
• according to any valid binding death benefit nominations; and
• according to the terms of the trust deed.

You can read more about pensions, reversionary beneficiaries and death benefits here.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of SMSF-related topics.

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