Estate Planning

When a Member dies, the Member’s benefit will be passed on to a beneficiary or beneficiaries. This can be done in a binding death benefit nomination (BDBN), also referred to as an “SMSF Will”. A benefit can be left to dependents, non-dependents and the legal estate of the Member.

When the Trust Deed is silent as to who the beneficiaries are and no BDBN exists, the member benefit will pass on to the estate of the member and be allocated from there according to their will or testament. The disadvantage of this approach is that outside parties may lay claim to the estate, e.g. previous spouses, family members or even creditors. For this reason it is prudent to indicate in the SMSF Deed or in the BDBN who should receive the benefit.

Tax Implications

When a financial dependent receives the death benefit, there’s no tax to be withheld. If non-financial dependents receive the benefit, e.g. adult children, the SMSF must pay tax of  16,5% tax before transferring the benefit out. You’ll find further information about taxation and financial dependents on our tax pages.

Trustee Discretion and Legislation

Remember, Trustees control the benefit in the SMSF. In the case of Katz v Grossman, the second trustee used her Trustee powers to determine the allocation of the member benefit. In this case, a member of the Fund died leaving two children – a daughter, who was a trustee of the family SMSF, and a son, who was a non-member.  The father left $1M in SMSF benefits with a direction in his Will that all his SMSF assets were to be split between his two children equally.

On his death, the remaining trustee – his daughter – did not take into account his nomination and paid all of the deceased member’s benefits to herself.  The NSW Supreme Court held that she was entitled to take this action under the Fund’s trust deed and the Will was ineffective.

Recent Legal Case

The recent decision of Wooster v Morris describes what happened when a Trustee died and left his member balance to his children. His second wife and co-trustee tried to overthrow a BDBN. The court concluded the Trustee (second wife) acted impartially, favouring herself. It was a 3.5 year battle to honour the wishes of the deceased. Read a lawyer’s summary of the case in this summary, SMSF Succession Planning.

Lesson – be careful when choosing a co-trustee to ensure an SMSF fulfills your objectives.

Four SMSF Estate planning options

There are effectively four ways that you as a trustee can look after your dependents or others from your SMSF on your death:

  • You can pay a lump sum from your benefits in the fund, by way of cash or assets, to a dependent or the trustee of your legal estate;
  • You may pay a pension from your benefits in the fund to a dependent.  There are restrictions on paying pensions to child dependents over the age of 18 unless the child is a student under the age of 25 or a child who is disabled;
  • A reversion of an existing pension which results in the continuation of the pension in the name of the reversionary beneficiary, provided the person is a dependent – again subject to the child limitation above; and
  • Any insurance proceeds from a life insurance policy held in your name as a trustee may be used to increase the deceased member’s benefits.

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Here is the BDBN or SMSF will. This will be valid until the Member decides to change it.

Binding Death Benefit Nomination

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