The importance of regular planning reviews

Multiple superannuation legislation changes have occurred over the past few years. Scott Hay-Bartlem illustrates how these changes and other evolving factors make regular reviews of estate plans a must.

Many people talk about the lessons they have learned over the past few years. One important lesson in the SMSF ecosystem is the importance of not just creating a robust SMSF estate plan, but also of reviewing it.

That leads to the question of how often should an estate plan be reviewed. The simple answer, of course, is “it depends”. This article will discuss some triggers that can help guide advisers and trustees with regard to this decision.

The outcome of a review is not always wholesale changes. Some reviews do not result in much, but other times quite extensive changes are necessary.

The failure to review as necessary has many possible consequences, including the wrong beneficiaries benefiting, unnecessary disputes and extra costs, and all at a difficult time.

Law changes

In the SMSF ecosystem, the rate of law changes has been astronomical and we are likely to see more in the future.

Law changes can be quite extensive. For example, we have seen the Simpler Super changes of 2007 and the transfer balance cap changes of 2017. These both had significant flow-on effects to SMSF estate planning.

Any estate planning that involves superannuation really must be reviewed after 1 July 2017. There are several reasons for this.

As a result of the 2017 changes, any SMSF with more than $1.6 million in a pension for a member will have changed.

One very common scenario is SMSFs that only had a pension account for a member now also have an accumulation account. For example, Liz started an account-based pension in 2015 that was reversionary to her husband, Phillip. At 30 June 2017, the balance in Liz’s pension was $2 million, so on 1 July 2017, she was no longer able to have a single pension and instead had to have a pension and also an accumulation account. While her pre-1 July 2017 strategy of a pension that is reversionary to Phillip worked to send all of her superannuation to him, now that she also has an accumulation interest, we also need to take the additional step of putting in place a binding death benefit nomination to Phillip for the accumulation interest.

Another estate planning implication from the 2017 changes is when the first person in a couple passes away we can no longer always simply pay a death benefit as a pension to the survivor. If a benefit cannot be paid as a pension, then it must be paid as a lump sum. This means we are seeing more money leave the superannuation system in this scenario. For example, Liz’s $2 million SMSF balance probably cannot all be paid to Phillip any more as a pension, and it is likely some must leave the superannuation system.

In light of this development, where should those funds go? If there is a significant amount that is going to leave the superannuation system on Liz’s death, do we want the funds to end up in Phillip’s name? What might he do with them and will that cause tax issues for him due to the increase in his income?

One consideration is whether the excess superannuation can be directed into the estate of the deceased member to form part of a testamentary trust. This may have benefits for income splitting with children or grandchildren, or protection from future spouses. It will be important to make sure the testamentary trust is properly worded so as not to trigger death benefits tax if the surviving spouse will be a principal beneficiary.

A further consequence of the 2017 changes was that some people withdrew some or all of the excess over their transfer balance cap from the superannuation system. For example, Liz may have set up a family trust for the excess of her superannuation over her transfer balance cap. This means Liz’s estate plan still needs to consider her pension in the SMSF and also how she now passes on control of her family trust after her death.

Finally, court decisions such as Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65 (death benefit payment processes) and McIntosh v McIntosh [2014] QSC 99 (conflicts) have also affected the steps we should take at the planning stage to minimise their impact. Failure to take these court decisions into account can lead to good SMSF estate planning not working out as intended.

Asset changes

There are many life situations that result in a significant change to asset holdings. These can occur in many different ways and should be monitored for the impact on SMSF estate planning.

With the significant cost of and increased reliance on different types of aged care, money may be withdrawn from the superannuation environment to fund those arrangements.

Any return from the aged-care funding forms part of the estate of the person when they die. This can result in a rebalancing between the superannuation and other estate assets and distorts outcomes where the plan is to send retirement savings to one beneficiary or group of beneficiaries, and then the estate to another or others.

For example, if Liz intends her husband to receive her superannuation assets when she dies, with her estate being divided between her four adult children, that plan will be thwarted if a significant amount is withdrawn from the SMSF to pay for aged care as it will be returned to her estate when she dies. This could result in Phillip receiving far less than was intended and a significant amount more going to her four children.

By the time aged care has been considered, the person in question may have lost capacity, making it too late to change existing arrangements. Whether attorneys can change binding death benefit nominations and similar documents is a discussion for another day. It is therefore very important when preparing an estate plan to consider this possibility and include adjustments in case superannuation forms part of the estate.

Another issue that has a similar impact is where money is withdrawn from an SMSF shortly before death. The taxation consequences of superannuation benefits being withdrawn before death can be significantly different to paying a death benefit after death. For example, superannuation death benefits being directed toward adult children rather than to a spouse can have vastly different tax consequences if it is paid as a death benefit after death rather than a member benefit before death. A good estate plan should take into account the fact superannuation may be withdrawn before death and the potential rebalancing that results.

Change in family circumstances

Family relationships take many different forms and families can change in many and often unexpected ways. Changes in family circumstances are triggers for reviewing SMSF estate plans.

Entering or leaving de facto relationships, along with marriage and divorce, are obvious warning signs that SMSF estate plans could be out of date. Many think a marriage ceremony is the trigger for review, but in modern Australia a de facto spouse has most of the same rights and a de facto relationship often starts much earlier than most realise.

Harnessing the discretion in death benefit payments, particularly with regard to SMSFs, is a powerful tool and often a major choice is between having them paid out via the estate or being distributed directly to the beneficiaries. The best answer could change significantly with the estrangement of a family member or with marriages, divorces or financial issues among family members. It is important with superannuation and SMSFs particularly to ensure assets are not distributed through estates where there is a risk of an estate challenge (subject to the notional estate provisions in New South Wales).

This must be balanced against the downside of distributing superannuation directly to beneficiaries as it exposes the inheritance to risks resulting from business and marriage breakdowns and the like. There are situations where paying superannuation into an estate and using testamentary trusts to protect the inheritance is the better alternative.

A common strategy is for superannuation to be directed equally between adult children after the death of both parents using a binding death benefit nomination. But what happens if an adult child with children of their own dies before the parents? Under most documents, the result is the surviving children receive all the superannuation equally, meaning the grandchildren miss out altogether. Where an adult child dies before their parents, SMSF estate plans must be reviewed to ensure the grandchildren’s share is directed back into the estate and the grandchildren inherit under the will should that be the intended outcome.

For example, if Liz’s son, Charles, dies before her, a binding death benefit nomination between her four children equally results in Margaret, Andrew and Edward receiving all her superannuation and Charles’s two sons receiving nothing. Instead, the binding death benefit nomination must require the payment of Charles’s share to Liz’s estate, where her will leaves the superannuation between Charles’s two sons.

Conclusion

There are many issues when implementing SMSF estate plans and these only seem to be increasing. On top of all of those issues it is really important for advisers to stay on top of changes in client circumstances so there can be an informed discussion of what should/could/must change as their situations evolve.