Estate Planning

Estate planning in an SMSF is also referred to as an SMSF Will. Its generally good to have a Binding Death Benefit Nomination (BDBN). This is compared to a nomination that is not binding and will lapse in 3 years. Remember that benefits has to be left to natural persons.

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.

Difference between a Binding and a Non-Binding Nomination

  1. A Binding Nomination: The Trustees are bound to pay the death benefit as nominated to your nominated beneficiaries. You can nominate who gets the benefit which prevent unwanted claims against your super. A BDBN normally remains valid for 3 years.
  1. A Non-binding Nomination: The Trustees have the discretion to follow the stated wishes of the member

-or direct the entitlements to another person (or persons)

-or pay the entitlement directly to the Estate.

 

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.

 

Legal Cases

Mixing family with money and estate planning makes for an interesting set of scenarios. There’s five commonly referred-to legal cases that’s important for SMSF’s – and it makes for very interesting reading. Click to reveal more details.

Katz v Grossman - Trustees are not bound by the directions of a Will
Donovan v Donovan - a nomination is non-binding on Trustees unless its specifically noted as Binding
Munro v Munro - An invalidly worded BDBN is not binding
Wooster v Morris - BDBN was upheld, but only after a lengthy legal battle, trust your fellow Trustees
Ioppolo v Conti - BDBN was not valid as the Deed did not allow for a continuing nomination

 

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.

Downloads

Available for download below is a BDBN. This is also sometimes referred to as an SMSF will. This will be valid until the Member decides to change it by replacing it with a new BDBN.

Binding Death Benefit Nomination

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