by Olivia Long

TIP 1 - Your super isn’t automatically dealt with as part of your estate


Many people don’t realise it is the governing rules of the SMSF that determine what happens to your superannuation balance when you die. The trustees of your SMSF may have the discretion to distribute your superannuation to any dependent upon your death unless a valid binding beneficiary nomination is in place.

For this reason, your death benefit nomination is a vital document and should be part of your estate planning. A death benefit nomination is a form that can be updated at any time and should be reviewed regularly (especially in the event of the death of a nominated beneficiary or divorce).

TIP 2 - Your Nomination of Beneficiary Form may not be legally binding

Before May 2009, in order for a nomination to remain valid, there was a legal requirement to renew and sign a binding nomination form every three years.

For a nomination form to be legally valid it must be witnessed and signed by two independent parties not nominated on the form and who are at least 18 years of age.

This posed a great risk to SMSF members, as anybody forgetting to renew their form every three years no longer had a binding nomination in place.  It is likely that many SMSF members who don’t have a financial adviser or SMSF administrator do not have a binding nomination on file.

This may not be a great risk where the only members are spouses. However, consider a single member fund, where alternate directors are appointed on death, or a four-member fund where the members are related parties. If one of the members dies and does not hold a legally binding nomination form, it is at the other trustees’ discretion as to where and how the death benefit payment is made.

TIP 3 - You can elect to have a perpetually binding nomination

In May 2009 a ‘perpetually binding’ nomination was introduced. This means once completed and witnessed it would continue to be valid unless updated or replaced.

As this only recently came into effect, we recommend trustees review their deed and consider upgrading it, if necessary before putting a perpetual binding nomination in place.

TIP 4 - You can’t pay your super to just anybody

There are restrictions on who can receive your super death benefit.

Your death benefit nomination is restricted to either:

  • A dependent including: spouse (de-facto); children (including those over 18 years but with possible tax consequences); tax dependent or any person with an interdependency relationship;
  • Legal Personal Representative that includes: the executor of the will or the administrator of the estate;
  • Friends, siblings, parents and other relatives are not normally ‘dependents’ and should only be nominated if there is an interdependent relationship.


TIP 5 - You can claim an interdependent relationship if applicable

An interdependent relationship is a close personal relationship between two people who live together where one or both provides for the financial and domestic support and care of the other. This definition may include parent-child relationships that don’t fall within the definition of death benefits dependent and sibling relationships.

For example:

  • Two sisters, divorced and now living together with no children. If they are seen to have an ‘interdependent relationship’ valid death benefit nominations can be made by each of them naming the other as their respective beneficiary of their superannuation death benefits.


It is strongly advised that specialised legal advice be sought if you wish to make a nomination based on the existence of an interdependent relationship as described above.

TIP 6 – You can minimise the tax paid by your non dependents

A member balance is made up of ‘taxable’ and ‘tax free’ components. These components are often confused as members consider their super ‘tax free’ once they are drawing a pension and over the age of 60 (which it is) – however these components are maintained as long as a member balance exists (regardless of whether the fund is in accumulation or pension phase) and determine if any tax is payable when the benefit is paid out to a non-dependent.

To a dependent, the death benefit is 100% tax free, regardless of the ‘tax free’ and ‘taxable’ components of the member balance.

If a death benefit is paid to a non-dependent, tax is payable on the ‘taxable’ component of the amount.

Hence it is preferable to have a high ‘tax free’ component to minimise any tax that may be payable on a superannuation death benefit to your nominated beneficiary.

The ‘tax free’ component will generally comprise:

  • Non-concessional contributions;
  • Spouse contributions;
  • Government co-contributions;
  • The old pre-July 83 component before crystallisation.


The ‘taxable’ component will generally comprise:

  • Member concessional contributions;
  • Employer contributions;
  • Share of income/loss.


Once a pension is established, the percentage of these components is crystalised and remains for the life of the pension. During the pension phase, the share of income/loss is therefore apportioned to both the ‘taxable’ and ‘tax free’ components of the member balance, based on the crystalised percentage determined at the start of the pension (in accumulation phase this amount is attributed entirely to the taxable component).

Example:

John Smith has nominated his 26-year-old ‘non tax’ dependent adult daughter, Claire Smith, as his beneficiary.



Should the entire amount be paid as a death benefit payment, the tax would be calculated as follows:
 
$220,000 x 16.5% (SMSF tax rate + Medicare) =  $36,300

As you can see, the tax on the taxable component of your super can significantly decrease the final amount distributed as a superannuation death benefit to your nominated beneficiary.

There are a number of strategies available to alter/reset the taxable/tax free proportion in your SMSF, including:

  • Maximising non-concessional contributions to your fund up to the applicable cap. These contributions are applied to the ‘tax free’ component of your member balance.
  • Withdrawal and re-contribution strategy* –  If you meet a condition of release, funds are withdrawn from the super fund by way of pension or lump sum withdrawal (tax free to those over the age of 60), and then re contributed as a non-concessional contribution up to the applicable cap. Funds withdrawn are done so on a proportionate basis (consisting of both tax free and taxable components, depending on the member balance). They are then re contributed as 100% tax free.


*We encourage SMSF members to seek financial advice before considering such strategies.

TIP 7 - You can continue your pension after you die

SMSFs have the ability to pay a reversionary pension if their trust deed allows it.

When starting a pension, members can nominate an ‘eligible reversionary beneficiary’. With this nomination in place, upon death, the pension continues to be paid to the reversionary beneficiary. These were often put in place to ensure the tax benefits enjoyed by the fund continued past the death of a pension member (as the balance would revert to accumulation status immediately on death, making any capital gains and income of the fund taxable). However, following the announcement of Tax and SMSF rulings, and an expansion of the income tax regulations in 2013, the pension exemption on income and capital gains of the fund will now continue following death until it is practicable to pay out the deceased pensioner’s benefits.

Therefore the main benefit derived from having a reversionary beneficiary in place is no longer relevant as the tax exempt status of income and capital gains is retained until the deceased member’s benefits are dealt with (in a timely manner). There are some situations where naming a reversionary beneficiary is still useful; however this depends on your personal situation. One situation is if a significant insurance payout is to be received by the fund on the member’s death. There are a number of factors at play in such a situation and as such should be discussed with a qualified financial adviser or estate planning lawyer.

TIP 8 - Replacing your role as Trustee when you die

As an SMSF Trustee, you should consider who will replace you when you die, and even further, who will step in to handle your affairs should you lose the capacity to run your fund.

When an SMSF member dies, the fund has six months from the date of death to arrange a suitable replacement for you as fund Trustee.

A number of funds comprise husband/wife. In the event of death, you could convert your fund to a corporate trustee structure, with the remaining member in the SMSF acting as sole trustee/member.

Alternatively, you could consider appointing a second individual to act as Trustee. Such a decision should not be made without legal advice.

TIP 9 - Don’t forget divorce

As many people sign their death benefit nominations without really understanding what they are, there is a risk you may forget about them and miss an important event. For example, it is common where you have a husband/wife fund for 100% of the death benefit to be paid to the spouse.

In the event of divorce, it is vital that the death benefit nomination be updated as well as the individual’s will. An incorrect assumption that your superannuation is dealt with as part of your will could result in your ex-spouse receiving your super death benefit which would not have been your intention (and may make you turn in your grave)!

TIP 10 – If in doubt, seek professional advice