A better estate planning path: part one

SMSF estate plans are increasingly being challenged in court, resulting in scrutiny over traditional techniques to allocate death benefits. In part one of this two-part series, Grant Abbott, founder of Lightyear Docs, details an alternative strategy that could result in better outcomes.

The following is a famous quote from author and lateral thinker Edward de Bono: “There is no doubt that creativity is the most important human resource of all. Without creativity, there would be no progress, and we would be forever repeating the same patterns.”

In the SMSF world never a truer word has been spoken. The industry seems to be filled with lawyers, commentators and advisers who prefer to say “no” or “it’s too hard” or “you have to come to me for advice on how to do that”, even though they then

disclaim all liability after weeks and many thousands of dollars in fees. No creativity whatsoever, but I guess compliance heads and lawyers tend to look for problems rather than innovate.

A case in point

The federal government, to its credit, and something I have been pushing since the 1990s, recently increased the maximum number of members allowable in an SMSF from four to six. This enables the expansion of an SMSF to a family super fund, something that is long overdue. Family super funds are something I have been talking about since 2000 and can show the 10 benefits in running a family super fund compared to a simple SMSF. This includes, among others, the whole family being able to house their superannuation benefits in one fund, thereby decreasing costs, the ability to access family group SMSF insurance, allowing separate investment strategies akin to wrap accounts for members, testamentary trusts flowing from the SMSF rather than the estate, paying sickness benefits and much more. The creative innovation will continue, in my mind anyway, but we see a lot of backward-looking attitudes, generally from the legal profession, for example, labelling the measure as a solution looking for a problem.

Are you an early adopter or a laggard?

For those who have not seen it, we start with an idea then innovate, create and develop that idea into a service or product, which enables the early adopters to take advantage of it. After a while the idea or strategy gains momentum before the early majority take it up. Eventually it flows to the late majority and then finally to the laggards. However, I have to say laggards are laggards and may take centuries to change.

Another case in point

The push to cloud computing saw many early-adopter accountants use Xero and other cloud-computing and accounting platforms. This practice then started moving into the early majority, but there were still many holding out, worrying about security and other issues, preferring to keep all data on premises. Then came COVID and with that lockdowns and border closures, which really shifted the needle and forced even the laggards to move. You cannot hold off change forever.

BDBNs are a laggard product

We have all heard of a binding death benefit nomination (BDBN) in terms of superannuation estate planning. They have been around forever and are at the laggard end of the product and service spectrum. There has been a lot written on them, lots and lots of cases challenging them and the tax commissioner even talks about the use of BDBNs and SMSFs in SMSFD 2008/3, noting: “Section 59 of the Superannuation Industry (Supervision) (SIS) Act 1993 and regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 do not apply to selfmanaged superannuation funds.”

Now that is a turn up for the books. The commissioner is saying the BDBN laws do not apply to SMSFs.

Who is a BDBN for?

BDBNs are for industry and retail superannuation funds, where members are not involved in the decision-making process. Without a BDBN, the trustee of the superannuation fund would have complete discretion and a long decisionmaking process as to how a deceased member’s super benefits are to be paid. As a result, there is such a huge backlog of cases in the superannuation division of the Australian Financial Complaints Authority (AFCA). The former Superannuation Complaints Tribunal had more than 10,000 death benefit cases for review prior to the restructure that established AFCA. After all, any dependant or executor of the deceased’s legal estate can challenge a public offer fund trustee’s decision-making process in relation to the payment of death benefits unless there is a BDBN.

And then we have some experienced SMSF specialist lawyers who openly state there is no BDBN that is not unchallengeable.

Given the commissioner of taxation has issued a determination that the BDBN laws do not apply to SMSFs and specialist practitioners admitting these arrangements are up for challenge, you would have to ask why any adviser would prepare or even recommend a BDBN for an SMSF.

And if an adviser gets it wrong, clients can take legal action against them under section 54C and 55(3) of the SIS Act to recover losses and damages from any person who has missed out as a result of a faulty BDBN.

A better way for the early adopters

Normal estate planning deals with how to distribute a testator’s estate upon their death and involves the use of a will. SMSF estate planning is the creation of a plan on how to distribute a member’s superannuation benefits in a written plan upon their death.

The tax commissioner in SMSFD 2008/3 has stated his views as follows: “The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the superannuation fund and not in accordance with the terms of the deceased’s will. A member can make a death benefit nomination that is a binding direction on the trustee of an SMSF if that is provided for in the governing rules of the fund.”

In short, the commissioner has ruled that a member of an SMSF can make a set of directions, gifts and bequests in relation to their superannuation estate, in much the same way as their will, provided it is allowed under the fund’s deed or governing rules.

The SMSF will

The SMSF will is any document accepted by the trustee of the fund dealing with the transfer of a member’s benefits in the event of a their death. An SMSF will is binding on the trustee, both past, present and future.

Each trust deed and set of governing rules will have a different description of an SMSF will and what it means. Many SMSF deeds do not provide for these arrangements and are still offering the challengeable BDBN.

For example, the LightYear Docs SMSF will document, which is tied into and forms part of the fund’s governing rules, states the following about an SMSF will:

An SMSF will, consisting of a set of binding directions (see SMSFD 2008/3), is an important legal document that becomes part of the governing rules of the fund detailing how a member seeks to provide superannuation death benefits to their dependants, non-dependants or legal estate in the event of their death. In creating an SMSF will, among others, there are several possibilities:

• the provision of a superannuation lump sum — by way of cash or specific assets to dependants and/or the deceased member’s legal estate,

• the payment of a superannuation income stream to dependants (as defined for taxation purposes) of a deceased member subject to the SIS Act,

• the payment of a reversionary superannuation income stream to a dependant subject to the SIS Act. A reversionary pension is the continuation of an existing superannuation pension that was payable to a deceased member of the fund,

• the payment of an adult child dependant’s benefits directly to the child or to an SMSF testamentary trust to protect the benefits and protect from any legal challenge to the estate, and

• where a member of an SMSF has more than one superannuation interest in a fund consisting of varying tax-free/ taxable components — the choice of allocating from these interests to various dependants and non-dependants.

Six component parts to an SMSF will

In the next part of this series, we will look at the six key components of an SMSF will and why they are so important and reliant on each other. The six components in headline form are:

1. Revocation of prior SMSF wills and BDBNs – how can you prove which is which if the earlier is not revoked.

2. Reversionary pension to take precedence or not.

3. Whether the member’s executor or their legal personal representative takes the deceased member’s place as trustee of the SMSF as per section 17A(3) of the SIS Act.

4. How the deceased’s superannuation benefits are to be distributed and whether they will be paid directly to the beneficiary or beneficiaries, be placed into an SMSF testamentary trust, be used to fund a pension, or be included in the estate. Also, if the primary beneficiary is not alive, or renounces their entitlement, who the next beneficiary is and so on.

5. Who is the adviser to the deceased’s SMSF estate? This is a binding forward services contract.

6. If the fund is held to be non-complying, what is the default option?