Death benefits under the new super reforms have heightened the importance of estate planning considerations in relation to superannuation. Many clients are still not aware that their personal will, in most cases, does not have bearing on the payment of their SMSF death benefits. From 1 July 2017, we have been involved in cases where deceased member benefits have had to be cashed out of the superannuation environment, due to transfer balance cap limitations.
Most SMSFs trust deeds will permit payment of death benefits as a lump sum, pension or a combination of both. The SMSF trust deed, death nominations, binding death benefit nominations and pension documentation (if applicable), need to be reviewed to check if the trustee is bound to pay the death benefit to a specific beneficiary and in a specific form or is discretion required.
As a reminder, these are some of the key considerations from 1 July 2017:
- Knowing the difference between a death benefit pension and reversionary pension and whether the actual pension documentation in place is valid in respect of either option Reversionary pensions will give the beneficiary 12 months breathing space to decide on how best to take the benefit, but the clients may want the trustee to have full discretion on payment of the death benefit. There is no one size fits all solution
- As you can only access the $1.6M transfer balance cap once, will there be any compulsory cashing of death benefits and how will the fund cope with this?
- Does the fund have pension death nominations and binding death benefit nominations in place? If so, are they in conflict with each other? Keep in mind, pension death benefit nominations apply only to the pension interest, whereas binding death benefit nominations could apply to just the accumulation account or all accounts. This needs to be clarified.
- Does the SMSFs current trust deed comply under the current super reforms? As the SMSF deed represents the governing rules, clients need to ensure that the current deed is compliant under the new rules.
- As effective as binding death nominations can be, it can also result in death benefits not being able to be distributed to the estate if the nomination is made to the surviving spouse.
Your SMSF clients do not want to be in the position where on the death of a member, asking what happens next?
Looking at SMSF death benefits in isolation from the member's estate planning requirements is extremely risky and we recommend a full review is conducted by a qualified solicitor.