In a monthly column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.
I’m visiting an estate planning lawyer this week to finally update my will.
I hate to admit it but this is the first time I’ve had it reviewed in 20 years. Back when my current will was drafted, my youngest child was a newborn, I was married and my husband and I had pretty much no assets other than our home and shares in our fledgling business.
As I race through my 50s, life looks different. So it’s definitely time.
I know one of the issues that will come up is whether or not I should have a binding death benefit nomination for my super so that’s something I’ve been thinking about in advance.
Will it make a difference?
Let me start by saying that if I belonged to an APRA fund, I would absolutely have a binding death benefit nomination. The idea of complete strangers needing to pour over my affairs to work out where my super should go (and delay delay delay) sends shivers down my spine.
But all my super is in my SMSF. Does that make a difference?
I think it makes all the difference in the world.
For a start, I have two levels at which I can control what happens with my super after my death – both a binding death benefit nomination and who controls my SMSF after I die.
Let’s think about control first.
I currently own all the shares in the trustee company for my SMSF and I’m the sole director. That means if I die, control of those shares initially passes to whoever I nominate as my executor(s). They would be able to use their power as shareholders to appoint themselves as directors of the corporate trustee. And that would be useful because the SMSF would be pretty rudderless until someone else was appointed as a director. Until then, my fund couldn’t even lodge returns or make changes to its investments. On this front, it’s worth noting that while the SMSF rules allow executors to be trustees of SMSFs on the death of a member, it usually doesn’t happen automatically. They still need to formally take on the role (and in my case, become directors of the trustee company) before they can do anything.
(As an aside, my will could leave control of those shares to someone else. That might make sense if, for example, I decided that my two sons were too young to take on the role of executor and instead asked someone else to do that job for me. I could still leave the shares themselves to the boys. While that would give them the ability to hire and fire directors eventually, that wouldn’t happen until the executor(s) actually distributed that particular estate asset to them. By then, my death benefit might have been dealt with and the shares effectively useless.)
The key, though, is that this ability to choose a specific person or people to take charge of my SMSF once I die, means I can make sure the 'right' person is in the driver’s seat when it comes to making decisions about my super – not a faceless trustee of a large public super fund.
If I’ve got that covered, would I also put a binding death benefit nomination in place?
Remember a binding death benefit nomination is a document that binds the trustee and requires them to do specific things with my death benefit. In an SMSF, this document can last indefinitely if the trust deed allows for that (it wouldn’t need to automatically expire every three years like it would in a public fund). It can also be far more precise than binding nominations for public funds. It could, for example, give different instructions for different parts of my super (my pension could be treated differently to my accumulation account), set instructions that depend on other events – for example “if my youngest son is still considered a dependant, give it all to him”, stipulate that particular assets are to go to particular beneficiaries and more.
Flexibility is an issue
The thing that makes me nervous about binding death benefit nominations is that they take away some of the flexibility for the people left in charge – who are often also the beneficiaries.
My late husband didn’t have a binding death benefit nomination and that was deliberate. It left me (his executor and primary beneficiary under his will) with a lot of flexibility to arrange things the way I wanted based on whatever my own super, his super and the tax rules looked like at the time.
If he’d had a binding nomination directing all his super to his estate, for example, I couldn’t have kept some of it in our SMSF to start a pension.
If he’d had one that nominated me as his sole beneficiary, I couldn’t have had any paid to his estate.
And in either case, I couldn’t have entertained the idea of paying some of his super as pensions to our (then dependent) sons. (OK – let’s be honest, this was only a very brief consideration. I’d like to think I’m a generous parent but I’m not crazy.)
Of course, a binding death benefit nomination that considered every possibility could have accommodated all of the above. But that would take a lot more careful consideration than just filling in a standard form available from my accountant or adviser.
It wasn’t relevant in our case but I’ve seen plenty of clients with binding nominations that effectively require a deceased’s pension to automatically continue to the surviving spouse. That might be great for some people but it does mean that the surviving spouse misses out on some valuable choices.
For a start, the deceased’s pension balance immediately becomes part of the surviving spouse’s 'total super balance'.
For some couples that will make all the difference when it comes to whether or not the surviving spouse can make further super contributions one last time. For example, someone with $1 million in super themselves who inherited their spouse’s $1 million pension in May 2024 would have a total super balance of $2 million at 30 June 2024. That means no more non-concessional contributions in 2024/25. In contrast, the ability to delay the start of any new pensions until 1 July 2024 would mean non-concessional contributions could continue in 2024/25.
The proposed new tax on people with more than $3 million in super will, if introduced as planned, also depend heavily on the survivor’s total super balance at 30 June. For example, someone with $4 million in super who inherits a spouse’s $2 million pension automatically in May 2026 would have $6 million in super at 30 June 2026. This could result in much more tax being paid than necessary for the 2025/26 financial year.
So what am I going to do?
I think the situation is slightly different once you’ve reached the point where the strategic planning options have diminished. In my case, for example, chances are my two sons won’t be eligible to receive my super as a pension (this stops when they turn 25 even if they are still – heaven forbid – dependent on me at the time). That means my super will definitely have to come out of the SMSF on my death. In that case, the downsides of a binding death benefit nomination aren’t so significant. I could comfortably have a binding nomination that required the balance to go to my estate knowing that it’s the most tax effective option anyway (it means no Medicare Levy).
I guess there’s always the chance that I remarry. Doing so will mean my new will is invalid (unless I update it again in contemplation of the marriage). But the same wouldn’t apply for a binding death benefit nomination, it would remain in place. That might mean the supposedly 'safe' option actually becomes the very worst thing I could do – my super would no longer be guaranteed to end up with my children.
Perhaps the most important thing I need to do at this stage is make sure I don’t leave it another 20 years to update my will if anything significant happens in the meantime.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
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