A will is not always the way to protect your wealth

Many SMSF members overlook one of the most important estate planning tools for their superannuation.

In my discussions with clients about passing on the interest in their SMSF to their children or others, it has often emerged that they believe that a will says it all. That a properly drawn up will can ensure that on their death, their interest will seamlessly pass to their designated beneficiaries.

While an effective will can do many things, it takes a secondary role when dealing with a person’s SMSF.

This situation arises because a superannuation fund is a special type of trust that must comply with numerous laws and regulations to receive concessional taxation treatment. Your interest in a super fund is an interest in a trust and your rights as a beneficiary of that trust are ultimately determined by its trust deed.

In fact, you do not personally own the wealth in your super, especially a self-managed super fund (SMSF), because it is held in a separate legal entity being the super fund (which is a form of a trust). More critically, the trustee of the fund has the discretion over the payment of benefits from your super fund.

In many cases, your super instructions will override your will. And your will cannot deal with your SMSF interest unless the trustee of the fund, in its discretion, decides to pay the superannuation interest to your deceased estate. So how do you ensure that your wealth is used in the manner that you want for proper estate planning?

The trust deed of your SMSF can define the circumstances under which the trustee will follow a direction given by you to the trustee. This can deal with the manner in which – and to whom – your superannuation interest is to be paid upon your death.

Many large public offer superannuation funds permit a member to make a death benefit nomination, often on a binding or non-binding basis, which the trustee is either contractually bound to follow (if binding) or may take into its consideration (if non-binding) in paying a death benefit from the fund.

The nomination must be binding to provide certainty, and ideally it should be non-lapsing so that any strategy based on the nomination will not accidentally lapse. That’s why a binding death benefit nomination, or BDBN, is the most important estate planning tool dealing with the payment of your interest in a superannuation fund. A BDBN is especially useful in the context of a SMSF, because what may be achieved through the use of a BDBN for estate planning purposes is limited only by the trust deed for the fund.

Depending upon the specific terms of the SMSF trust deed, it might be possible to create a BDBN that can implement special and creative strategies for SMSFs, such as creating a life estate over the superannuation interest in favour of your spouse or providing for contingencies, such as where an intended recipient fails to survive you.

BDBNs have advantages for estate planning when dealing with an SMSF interest. They include the fact that they have immediate effect. Unlike a will, there is no need to wait for probate or other authority or validation to implement it. Another advantage is that BDBNs can be used to create tax-effective income streams within an asset protected environment, such as a non-commutable tax-free pension for life if you or your pension beneficiary was over 60 years of age.

Where your SMSF is involved, making a will is not enough to deal with the entirety of your wealth. It will be necessary to specifically address how to pass on the benefit or control of your SMSF interest both on your death by making a BDBN.

Brian Hor, Townsends Business and Corporate Lawyers 

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