Here's What You Need to Know About SMSFs & Succession Planning
In Australia, Self-Managed Super Funds (SMSF) are very popular, with around 600,000 SMSFs now holding assets exceeding $890 billion. Despite this widespread use, many Australians overlook a critical question when succession planning — "what happens to their SMSF upon their death?"
SMSFs and Your Will: Are They Connected?
Many people assume that their SMSF automatically covered by their will, however this is not the case. Superannuation assets, including SMSFs, are handled separate from your estate unless otherwise directed.
This requires you to make specific arrangements and prepare the relevant legal documents to ensure your SMSF benefits go to your intended beneficiaries.
Why SMSF Succession Planning Matters
Without proper planning, control of your SMSF could fall into unintended hands. Even worse, your super benefits could be distributed contrary to your wishes, potentially leading to costly legal disputes among family members.
Key Considerations for SMSF Succession
1.Trustee Structure Determines who will Control the Fund
- Individual Trustees: If your SMSF has individual trustees, upon death of a trustee a successor will assume control based on the provisions and rules of the trust deed. It's crucial to ensure your SMSF trust deed allows you to appoint a trustworthy individual as trustee who respects your wishes.
- Corporate Trustees: If you have a corporate trustee (a company acting as trustee), the situation is more complex. You should consider transferring directorship or shares within the company and outline clear succession instructions.
2. Binding Death Benefit Nomination (BDBN)
A trustee has the discretion to determine how your SMSF benefits should be distributed after your death. Preparing a BDBN binds Trustees to distribute your SMSF to nominated beneficiaries, provided the document complies with the super fund's rules. BDBNs generally need to be redone every 3 years.
3. Legal Personal Representative (LPR)
Your LPR, the executor or administrator of your estate, can temporarily assume the role of trustee or director after your death to ensure your death benefits are paid correctly. This isn't automatic and clear instructions in your trust deed or corporate constitution are essential for this to occur.
4. Timely Distribution of Benefits
Superannuation requires death benefits to be paid out as soon as practicable, generally within six months. Prompt action is necessary to ensure compliance.
Special Situations: Single-Member SMSFs
Single-member SMSFs need particular attention.
For funds with individual trustees there must always be at least 2 trustees of the superfund. If one trustee dies, a new trustee must be appointed. Otherwise, the SMSF must change to a corporate structure or risk being wound up.
If the fund has a corporate trustee, a single member can be the sole director. They may appoint an additional director in accordance with the company constitution during their life, or successive director in the event or their passing.
Importance of Enduring Power of Attorney
Planning for possible incapacity is equally important. If you are physically or mentally unable to manage your SMSF, an enduring power of attorney can allow you to appoint someone trustworthy to do so. This is possible when aligned with your SMSF's deed or corporate constitution.
Additionally, an appointed attorney can have the power to renew and confirm your existing binding death nomination every three years.
Steps to Ensure Your SMSF is Properly Managed After Your Death
- Review your SMSF trust deed and corporate constitution.
- Set up your BDBN or update your BDBN if you haven't renewed this in the last 3 years.
- Appoint a reliable co-trustee or additional director.
- Regularly review and update your succession arrangements as your circumstances change.
Getting clear legal advice for your loved ones and family
For blended families, meticulous planning is essential to avoid disputes.
Ensuring your SMSF passes smoothly to your chosen beneficiaries requires clear, precise planning. Consult our Wills and Estate Lawyers who are experienced in securing your assets to be able to preserve your wealth for your beneficiaries and protect them from unnecessary administrative burdens.
Taking proactive steps now can save your family from significant stress, uncertainty and potential estate disputes between beneficiaries in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
