Estate planning in an SMSF (Self Managed Super Fund), also referred to as an SMSF Will. It is 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 have 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 will 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.
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 rate of 17% (including 15% of benefit withheld and 2% of Medicare Levy) before transferring the benefit out. You’ll find further information about taxation and financial dependents on our tax pages.
Difference between a Binding and a Non-Binding Nomination
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.
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
Mixing family with money and estate planning makes 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.
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 dependant or the Trustee of your legal estate;
- You may pay a pension from your benefits in the Fund to a dependant. There are restrictions on paying pensions to a dependant over the age of 18 unless the child is a student under the age of 25 or a child 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 dependant – 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.
Available for download below is a BDBN. This is also sometimes referred to as an SMSF Will. This Will will be valid until the Member decides to change it by replacing with a new BDBN.