An estimated 59,000 self-managed super funds (SMSFs) have unmet needs for advice on estate planning.
Comprehensive surveys for the 2017 Vanguard/Investment Trends Self Managed Super Fund Reports found that estate planning is the area of the highest unmet need for advice. This equated to 10 per cent of SMSFs at the time of the surveys.
Further, the research found that 10 per cent of SMSFs had concerns about the ability of other members to manage their super funds following the death or serious illness of the most dominant fund member.
The recognition of tens of thousands of SMSF trustees that they need professional guidance with their estate planning is driven by a range of factors. These include the growing waves of baby boomers nearing or already in retirement, the large amounts of retirement money held by SMSFs and growing longevity.
While 46 per cent of SMSF members were aged over 60 at June 2016, almost 18 per cent were aged over 70, according to the tax office in its role as regulator of self-managed super.
Further, SMSFs hold more than half of overall superannuation assets invested in retirement products.
As a basic starting point for estate planning, it is critical for SMSF trustees (and all super members for that matter) to understand who is eligible to receive their superannuation death benefits. Another basic is to understand how different eligible beneficiaries may be taxed differently.
And it is critical, of course, to understand what will happen to your super savings (and any life insurance payouts) in the event of your death.
Superannuation benefits cannot be left indefinitely in your SMSF following death – even if the beneficiary is your surviving spouse and a member of the same fund. The amount must be paid out as a lump sum or continue to be paid as reversionary pension.
A common challenge for SMSFs arises if the most active member dies first. This can lead to difficulties for surviving members/trustees and other family members, unless adequate planning has been undertaken.
The numerous estate-planning issues for SMSFs or their members as individuals include:
Unfortunately, some SMSF members may not understand the differences between having individual trustees or a corporate trustee until a member dies.
Under superannuation law, a single-member SMSF must have a corporate trustee (with up to two directors) or two individual trustees. And the sole member must be either a director of the corporate trustee or one of the two individual trustees.
An SMSF left with a surviving individual trustee following the death of a member must appoint another individual trustee or a corporate trustee (which can have a single director) within six months of the death benefit commencing to be paid.
Another estate-planning issue related to trustees is that assets of an SMSF with individual trustees are held in the names of individual members as trustees. If the membership of an SMSF with individual trustees changes – perhaps following death, the names on the funds’ ownership documents must also change. This can be costly and time-consuming.
By contrast with a corporate trustee, assets are held in the name of a company as trustee. If trustee directors change, the assets remain in the name of the same company.
Having a corporate trustee rather than individual trustees, a trustee director can be more readily replaced in the event of death or serious illness. Corporate trustees continue to hold a fund’s assets regardless of a change of directors.
From July 1, 2017, estate-planning considerations have been further complicated by the introduction of a pension transfer balance cap. The death of a member in the pension phase is a high-risk time for a surviving spouse (or other dependant) in terms of their potentially breaching their own $1.6 million transfer balance cap.
A surviving spouse or dependant who had previously been well below the $1.6 million pension cap could quickly find themselves overshooting the $1.6 million cap with an excess transfer balance tax liability because of the deceased’s super pension, he emphasises.
It can be a valuable and thoughtful legacy to leave behind a well-organised SMSF where members have undertaken careful estate planning. Obtaining specialist SMSF advice is critical to achieving this.