STRATEGY
The finer details of death benefits Formulating an estate plan for an SMSF member is a complicated process. Grant Abbott lays out the critical items advisers need to determine when providing death benefit-related advice.
GRANT ABBOTT is the founder of Lightyear Docs.
It is projected that more than $300 billion in SMSF monies will be transferred from current SMSF members by way of death benefit transfers over the next 20 years. The sad part is much of it will be litigated and this brings costs, family squabbles and no access to much-needed income for the grieving family. Moreover, it is now in our face as a large percentage of SMSF members reach their twilight years. The continuous dire warnings from legal experts that binding death benefit nominations (BDBN) are easily attacked, plus the less than optimal advice of estate planning lawyers directing a deceased member’s superannuation to their estate, only to be potentially attacked by a family provisions challenge, means there is no certainty when it comes to SMSF estate planning. However, a solution might be at hand.
The new skill: SMSF specialist estate planners You may already have the skills to advise in the field of superannuation estate planning. The key issue is whether you are technically competent to provide advice on superannuation estate planning. In that regard I had a big hand in drafting the SMSF industry competency standards for the Financial Services Training Package in the early 2000s and they are still relevant today. These standards are objective and all practitioners must adhere and show their competency in dealing with SMSF members and trustees. They are over 50 pages long and identify the following competency requirements when it comes to advising on death benefits and SMSF estate planning. These are mandatory requirements: • the client is informed of the treatment of death benefits, • the client is aware of the impact of the trust deed on death benefit payments (lump sum and pension), • the adviser shows an ability to identify relevant
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Superannuation Industry (Supervision) (SIS) Act and Income Tax Assessment Act (ITAA) legislation and regulations relevant to each client, • the adviser shows an ability to use a range of interpersonal and communication skills to relate to a range of clients, and • the adviser is able to identify and show knowledge of the tax treatment of death benefits (lump sum and pension issues). Some 15 years on, in my opinion, a good SMSF specialist adviser and certainly one with estate planning knowledge must be able to answer the following death benefit issues: i. Should a BDBN be used? And what type and what cases show their deficiencies? ii. What is an SMSF will and how is it different to a BDBN? iii. Will current BDBN cases impact current SMSF estate planning? iv. How is the trustee or board of directors of a corporate trustee of an SMSF convened in the event of the death of a member? v. Does the member’s entitlements cease on death or carry on post death in the name of the legal personal representative? vi. Is it possible for an SMSF trustee to create a testamentary trust on the death of a member – one that flows from the SMSF and sits outside the estate? vii. Who can be paid directly from a superannuation fund? viii. What is tax dependency? ix. Can a reversionary pension go beyond two people to multi-generations such as grandchildren? x. What tax rates are applicable to life insurance death benefit pensions? xi. How do the family provisions laws in each state impact direct death benefit payments versus super passed to a deceased member’s estate? xii. How can you protect super from a family provisions claim if a member wants to pay all of their super to an adult child from the first marriage and not children from their second?
