Estate planning in an SMSF.
Estate planning in an SMSF: Eight things your clients can do now.
Putting some or all of these suggestions in place may save your clients a great deal of worry, time and expense.
Increasingly, your client’s super is the next major asset after the family home (sometimes it is the client’s most significant asset, as recently demonstrated in McIntosh v McIntosh  QSC 99).
It is therefore imperative that any estate planning for your client must also involve planning for their SMSF.
Here are eight things that you can do now for all your SMSF clients:
1. Consider what ‘Armageddon’ is for every SMSF
What is each fund’s 'Armageddon', or worst case scenario?
This will be subjective for each SMSF.
For example, in a 'husband and wife' fund where the wife always left the running of the fund to her husband, what if the husband suddenly died or lost mental capacity? Could the wife continue with the fund, or would it all be too hard for her?
2. Check the trust deed and (for a corporate trustee) the trustee constitution
It is essential for the constituent documents of the fund to authorise any ‘Armageddon’ strategies to be implemented.
For instance, making a binding death benefit nomination (BDBN) can achieve certainty regarding payment of a super death benefit, and can prevent disputes. However, does the fund trust deed authorise a BDBN to be made? If so, would the BDBN lapse after three years or can it be non-lapsing?
What about the trustee constitution? In a two-member fund with a corporate trustee, if one member dies the survivor can usually carry on as the sole director/shareholder. However, the trustee constitution must authorise this.
3. Amend trust deed and/or constitution if unsatisfactory
If the fund trust deed and/or trustee constitution do not authorise the relevant ‘Armageddon’ strategies, they will require amendment.
Consider also whether the trust deed should be completely updated (a common strategy) or should the amendment be more bespoke (especially where necessary to “grandfather” previous provisions).
4. Discuss ‘Armageddon’ with your clients
If the worst case scenario happened, what are the options? For instance:
- Could the surviving member continue to operate the fund, perhaps as a sole director of a corporate trustee?
- Or would it be better to simply wind up the fund and rollover to an APRA-regulated or small APRA fund?
5. Consider using the same trust deed for all SMSFs
If you have many clients who came to you with an existing SMSF trust deed, these conversations may be very different for each of them depending on what their trust deed says.
It may make sense (and ultimately save your clients angst and expense) to have the trust deeds for all your clients fully updated to a modern trust deed, well before their ‘Armageddon’ arrives.
6. Ensure all members have valid EPOAs
If all fund members have an up to date enduring power of attorney (EPOA), it makes things much easier in the event that:
- A member loses capacity - their attorney can become the trustee or director of the trustee in their place under s.17A of the SIS Act;
- A member departs overseas indefinitely - their attorney can become the trustee or director of the trustee in their place to avoid fund residency issues.
However, you need to ensure (on an ongoing basis) that the person nominated as attorney is not a disqualified person (e.g. someone convicted of an offence involving dishonesty), otherwise they will not be able to act as trustee or director of the trustee in place of the member.
7. Ensure BDBNs are up to date and non-lapsing
The last thing your clients need is for a situation like in Katz v Grossman or McIntosh v McIntosh to happen to them!
SMSFD 2008/3 confirms that, with a correctly-structured trust deed, a well-written BDBN can provide both certainty and an appropriate and tax-effective succession of your clients’ superannuation death benefits.
Whilst being non-lapsing means not having to remember to renew a BDBN, another issue is that some SMSFs don’t authorise a BDBN to be made by a member’s enduring attorney, so if it lapses and the member has since lost capacity the BDBN cannot be renewed.
8. Change from individual trustees to corporate trustee
For many reasons it is prudent to change from having individual trustees to a single corporate trustee, such as:
- Ease of administration on the death, bankruptcy or incapacity of a member;
- Ease of administration if a member departs overseas; and
- Minimise the risk of incurring multiple 'speeding ticket' fines from the ATO.
Wednesday 8 October 2014
Brian Hor, special counsel – superannuation and estate planning, Townsends Business & Corporate Lawyers and Caroline Harley, associate, superannuation, Townsends Business & Corporate Lawyers