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SMSFs and the control over estate planning

The basic requirements of an SMSF include having one to four members, where each member is a trustee. The rules of any particular SMSF, set out in clauses of the trust deed and related documents (the ‘governing rules’), determine how to reconstruct the trustee structure and death benefits upon the death of a member.

SMSFs provide members with additional control over their estate plans compared with typical retail, industry and employer funds. This is why the trust deed and related documents are critical in the estate planning process to determine what rules apply for SMSF trustees and members.

Implementation of deceased member’s wishes

There are various ways an SMSF’s governing rules may deal with the provision of death benefits to dependants. Depending on who is controlling the SMSF after the death of a member and the provisions in the trust deed on who should be paid a death benefit, the risk is that the deceased member’s wishes may not be implemented.

An SMSF trust deed may give total discretion to the surviving SMSF trustees to evaluate all potential eligible dependants of the deceased member and choose to whom and how much of the death benefit will be paid.

This type of clause can be invoked where these are the wishes of the deceased member, in order to provide maximum flexibility to determine who should be paid at the time of their death.

Alternatively, such a clause could apply where a binding death benefit nomination has failed, and by default, it falls on the trustees to decide who is to be paid and how much. A binding death benefit nomination may fail simply because a person nominated was a dependant at the time the nomination was created but was not a dependant at the time of death. For example, a former spouse may have been nominated and no alternative provided for.

Executor acting as trustee

Unlike other super funds, the executor of the deceased SMSF member’s estate can, and usually does, step in to act as trustee in the place of the deceased until all death benefits are paid or start to be paid. Where there is more than one executor, any number of these executors can act in the place of the deceased member as a trustee.

Once appointed, the executor takes on the full responsibility of a trustee and is subject to the same obligations and liabilities as the other trustees of an SMSF. Their appointment should be confirmed and accepted in writing. An ATO trustee declaration should be signed, and retained with fund records. Trustees are obligated to maintain records of changes to individual trustees or directors of a corporate trustee of their SMSF for 10 years.

Trustee succession

The tensions and risks that occur when wills and the distribution of an estate are managed poorly by an executor or court-appointed administrator can also arise with an SMSF. This is particularly so when trustees have discretion to decide how and to whom a death benefit will be paid.

Where there is no provision in the SMSF trust deed to allow a binding death benefit nomination or reversionary pension nomination, or none have been made or have been made invalidly, most trust deeds will give surviving trustees the power to determine which of the eligible dependants of the deceased should be paid and how.

To help ensure the payment of death benefits and smooth operation of the fund, it is important that the governing rules of the SMSF deal with trustee succession and the parameters of the trustee's duties and powers.

The law allows, but does not compel, the executor of the deceased’s estate to act in the place of the deceased as a trustee of the SMSF in which the deceased was a member. Further, the appointment is only from the date of death until payment of, or the commencement of the payment of, the death benefit.

Once a death benefit has been paid or starts to be paid, the executor must resign as trustee and the SMSF has up to six months from this time to rectify its trustee structure to satisfy the definition of an SMSF under superannuation law.

Trustee succession planning is important in funds where a member would prefer the remaining trustees to exercise discretion after their death rather than binding them to any course of action.

Alternative structures

Alternatives to having an executor step in as trustee are:

  • Another eligible person is appointed to act as a second individual trustee if the SMSF becomes a single-member SMSF. This person does not need to become a member of the SMSF but must otherwise satisfy the eligibility criteria required to be appointed as a trustee. They must accept their appointment in writing and execute a trustee declaration within 21 days of being appointed, as is the case with any new trustee appointment.
  • Such a new trustee does not need to resign once a death benefit has been paid. Their appointment also means that the SMSF continues to meet the definition of an SMSF and so no further action is required to amend the trustee structure.
  • Where the SMSF has a corporate trustee, a sole surviving member can continue as the sole director of the corporate trustee. The fund will continue to satisfy the definition of an SMSF. ASIC would need to be informed of the removal of the deceased member as director.
  • A second director, who also does not need to become a member of the SMSF, may be appointed. The appointee must satisfy the requirements to be appointed as director. They need to accept their appointment in writing, execute the trustee declaration and ASIC would need to be informed of their appointment as director. No further action is then required to amend the trustee structure.
  • In circumstances where a sole surviving member of the SMSF does not wish to continue with the SMSF for whatever reason, there may be no need to appoint anyone else as a second individual trustee or second director of the corporate trustee.

Provided the trustee can pay out the required death benefit, rollover entitlements to alternative superannuation arrangements, and wind up the SMSF within six months of the death of the member, then the fund is deemed to have satisfied the definition of an SMSF for that period. No additional appointments are necessary.

 

Peter Hogan is Head of Technical at the peak industry body, the SMSF Association. This article is general information and does not consider the specific circumstances of any individual.

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