Self-managed super funds (SMSFs) have seen a rapid rise in fame and popularity. If you’re a professional in accounting, financial planning or wealth management, you’ve probably overseen the establishment of SMSFs and manage compliance aspects for clients’ SMSFs.
With substantial wealth held in an SMSF, it begs the question: what is in place to ensure that the member’s death benefits are directed in accordance with their wishes?
There are two common mistakes made by advisors when it comes to SMSF estate planning.
Firstly, a binding death benefit nomination (BDBN) for a SMSF does not automatically expire after three years, as is the case with retail and industry funds, where BDBNs must be renewed. So unless your client’s circumstances or wishes have changed, for the second reason I will note later, it can be risky to renew BDBNs unnecessarily.
The second common mistake is failing to ensure that the BDBN is completed strictly in accordance with the requirements of the SMSF trust deed. The trust deed might annex a specific form to be used, there may be specific witnessing requirements or there may be a formal procedure by which a trustee approves the nomination.
It is imperative to “dot all the i’s and cross all the t’s” when it comes to completing a BDBN. Why? If the nomination does not satisfy the requirements of the trust deed then it is not a valid nomination and the SMSF trustee is not bound by it.
Take Stefan, for example. He and his second wife, Cynthia, are members of a SMSF. Stefan and Cynthia are the two directors of the corporate trustee for the SMSF. Stefan has contributed significantly to the SMSF and has 4 children from a previous relationship that he would like to provide for after his death.
Stefan completes a BDBN nominating 50% of his death benefits to pass to the trustee of his estate, so it could be distributed to his children in accordance with his Will. His advisor fails to check the trust deed, which requires that a nomination is made to either the member’s legal personal representative or a dependant.
Upon Stefan’s death, Cynthia (as surviving director of the trustee of the SMSF) determines that the BDBN was not valid as it did not comply with the trust deed. She decides to pay all death benefits to herself as his spouse and Stefan’s children miss out on any share of the benefits. The children are left with little choice but to make a claim on Stefan’s estate.
SMSFs can provide excellent advantages to members. However, it is important for professional advisers to properly consider the estate planning implications. Clients will be relying on your advice to ensure that their wishes are satisfied at their death. Make sure your client’s super fund is not just self-managed, but well-managed.