SMSF Technical Education & Strategies

Estate planning & your SMSF death benefits

Estate planning is the process of establishing arrangements that are legally effective in carrying out your wishes in the event of your death. Good estate planning coordinates these arrangements with regard to your home, your business, your investments, life insurance, any other property you may own , and of course your superannuation.

However, unknown to many people, this is not just about making a Will. In fact, with some of these assets, your Will may have no power to execute your wishes at all, and your SMSF monies are a classic example of this. As superannuation is highly likely these days to form a substantial part of an individuals wealth (especially those with a SMSF who tend to have higher average balances), its very important to understand what happens to your SMSF assets upon death.

SMSF benefits are not necessarily part of your estate

The first key concept that trustees have to get their head around is that your SMSF benefits do NOT automatically go to your estate to be dispersed according to your Will. Rather, the remaining trustee(s) of your SMSF will disperse your benefits based on the following situations (subject of course to the provisions contained in your Trust Deed):

- If you have a valid legally binding death benefit nomination in place within your SMSF (or a death benefits agreement or SMSF Will as stipulated by some trust deeds), then the remaining trustees must adhere to your wishes stated in this document. This will include specifying what payments are to be made to your dependants, or to your estate. Note that your trust deed must also allow this. See our other article, "SMSF Death benefit nominations" for more detail on this document.

- If you do not have a valid binding death benefit nomination in place, then the trustees can use their discretion to pay any amounts to your dependants (as defined under the SIS Act), or just pay it to your estate, or any combination of the two. Again, your trust deed may have some say in this, depending on how its drafted.

The second choice above can have poor outcomes. Consider Katz's case ( Katz v Grossman [2005] NSWSC 934) where a member of the SMSF died with two children – a daughter who was a trustee of the SMSF and a son who was not a member of the SMSF.  The father left $1 million in superannuation benefits stating in his Will that all these assets were to be split equally between his two children. 

On his death, the remaining trustee – his daughter, exercised her absolute discretion and paid all of those benefits to herself, as there was no legally binding death benefit nomination within the SMSF stating otherwise.  The NSW Supreme Court held that she was able to take this action under the SMSF's trust deed and hence the Will was not effective.

How are benefits paid and what are the tax consequences ?

As you will see in the next articles in this series, there are rules around who can receive your death benefit and in what form they can receive it, and there are different tax consequences that come with these decisions. Strategies that take account of all these issues will help you create a solid plan for the death benefits of your SMSF, which will of course form just one part of your overall estate plan.