Latest SMSF Estate Planning
Trends and Strategies
Deborah Wixted
Head of Technical Services, Colonial First State
Disclaimer
Adviser use only
This presentation is given by a representative of Colonial First State Investments Limited AFS Licence
232468, ABN 98 002 348 352 (Colonial First State). Colonial First State Investments Limited ABN 98 002
348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super,
FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension and FirstChoice
Employer Super from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557 and
interests in the Rollover & Superannuation Fund and the Personal Pension Plan from the Colonial First State
Rollover & Superannuation Fund ABN 88 854 638 840 and interests in the Colonial First State Pooled
Superannuation Trust ABN 51 982 884 624.
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© Colonial First State Investments Limited 2011
Focus of estate planning
Who will receive the SMSF death benefit?
In what form – lump sum or pension – will the SMSF benefit be
paid?
Taxation
Of the death benefit payment
Of the fund assets required to make the payment
Control and management of the SMSF
Management of fund assets
How does the SMSF death benefit interact with other assets and
structures?
A typical SMSF
Two individual trustees /
members
Aged in their early 60s
Like to include family
members
Want better tax planning –
could include death benefits
Approx. 60% of all SMSF
assets in shares and cash
Most likely source of asset
concentration
Trustee /
member A
Trustee /
member B
SMSF
Australian shares
Cash
Trend: binding nominations
SMSF Determination SMSFD 2008/3 clarified
binding nominations not subject to provisions of
SISR 6.17A
manner of identifying benefit recipient and proportion of
benefit they’ll receive
non-lapsing
Ensure governing rules permit this flexibility
Donovan v Donovan
Cooper Review and binding nominations
“The SIS Act should be amended so that binding death
nominations would be invalidated when certain ‘life events’
occur in respect of the member. The current systems used by
States and Territories under which testamentary dispositions
are invalidated could be used as guidance”
“Subject to [this] recommendation being implemented, the SIS
Act should be amended so that binding death benefit
nominations only have to be reconfirmed every five years”
No details on how non-lapsing binding nominations would
be affected
Trend: ‘superannuation will’
Binding nominations PLUS specific provisions in governing
rules
Leave specific super death benefits to specific beneficiaries
Provide for executor to take deceased member’s place
Pay out specific assets to specific beneficiaries
Make conditional or contingent death benefit payments
Important to engage other estate planning professions to
ensure success
Take care with understanding of the term ‘will’
Trend: death benefits to ‘non-traditional’
beneficiaries
Interdependency relationship
Exists where there’s a close personal relationship and –
live together, one/each provides other financial support, OR
either or both disabled or because temporarily living apart
SCT March 2010 bulletin: ‘temporarily living apart’ requires
parties to have lived together at some time
Not necessary if separated due to physical, intellectual or
psychiatric disability (eg. dementia)*
Financial dependency
Partial financial dependency sufficient (Noel v Cook)
Financial dependence doesn’t equal financial “need” (Faull v
SCT)
* Refer SCT D09-10\005
Taxation, insurance and SMSFs
1. Accumulation or pension interest?
Accumulation
Pension
Proportions determined at time of payment
Proportions determined on commencement
$150,000
taxable
$150,000
tax-free
$150,000
taxable
$150,000 taxfree
50%
50%
50%
50%
$1,000,000 insurance proceeds
received
$1,000,000 insurance proceeds
received
$1,150,000
taxable
$150,000
tax-free
$650,000
taxable
$650,000
tax-free
88.5%
11.5%
50%
50%
Taxation, insurance and SMSFs
2. Untaxed element
ATO ID 2010/76 clarifies that a lump sum death benefit will
include an untaxed element where the benefit includes life
insurance proceeds and a tax deduction has been claimed for:
life insurance premiums or
for a future benefit liability
Not necessary to claim a deduction:
In every income year, or
In the year in which the death benefit is paid
Consider taxation impact of any death benefits paid to nondependent beneficiaries
Additional insurance cover may be needed
Rollover any other super benefits with longer service periods
Anti-detriment and SMSFs
Anti-detriment benefits in SMSF may be funded out of a
reserve
Amount allocated out of reserve to increase death benefit
Allocation will count to deceased member’s concessional cap
Example
Tom is age 55 with 20 years service
$600,000 super balance, all taxable component, all nonpreserved
Tom is the only member of his SMSF
How can Tom maximise the death benefit paid to his
surviving adult children?
Anti-detriment and SMSFs
Anti-detriment Re-contribution
Account balance on death $600,000
Tax-free component
$0
Taxable component
$600,000
$600,000
$450,000
$150,000
Anti-detriment payment# $83,270
$20,817
Total death benefit
Tax-free component
Taxable component
$683,270
$0
$683,270
$620,817
$450,000
$170,817
Tax on death benefit
$112,739
$28,185
Excess contributions tax* $13,315
$0
Net benefit
$592,632
$557,216
# Using formula in ATOID 2007/219
* Assumes 9% SG contributions on $100,000 salary, $50,000 concessional cap and 31.5% excess contributions tax
Control and management of SMSFs
Graph 1 – an older population of
SMSFs means an increasing
likelihood of the SMSF making a
death benefit payment
40%
all SMSFs
30%
20%
10%
0%
<25 25-34 35-44 45-54 55-64 >64
Graph 2 - the death or mental
incapacity of a trustee means some
form of restructuring of the fund and
its assets will be required.
100%
80%
Corporate
Individual
60%
40%
20%
0%
All
Graph 3 – the prevalence of mental
incapacity through dementia in an
ageing population. Without proper
planning restructuring of an SMSF
becomes difficult
New
100%
80%
60%
40%
20%
0%
60 - 65 - 70 - 75 - 80 - 85 - 90 - 95+
64 69 74 79 84 89 94
Management of fund assets
1. Preserve fund assets following death
Avoids:
Selling an asset when not desirable to do so
Incurring unexpected valuation and transactions costs
Triggering a capital gains event
Possible strategies:
Pay and income stream benefit supported by the asset
Cash contribution by beneficiary plus ‘asset swap’
Non-member benefit life insurance policy plus ‘asset swap’
In-specie lump sum death benefit in whole or part
Management of fund assets
2. Capital gains tax, exempt current pension income and
the death of a member
Tax exemption on income from assets supporting pensions
may be extinguished on the death of the last member
Requires liability to pay a pension death benefit to avoid CGT
Refer:
ATO ID 2004/688
National Tax Liaison Group Superannuation Sub-committee
discussions
ATO Priority Technical Issue and possible ruling
Management of fund assets
2. Capital gains tax, exempt current pension income and
the death of a member, continued
Strategy: turnover fund assets
Refresh cost base without undertaking ‘wash sales’
Strategy: offset taxable income from gain with deduction that
arises by paying an anti-detriment payment
Strategy: offset taxable income from gain by claiming a
deduction for future benefit liability
Eg. 55 year old with $420,000 balance and $600,000 death
cover could result in a deduction of over $290,000
Management of fund assets
3. Limited recourse borrowing and estate planning
Many commercial borrowing arrangements require fund
assets to generate a threshold level of income
Death of a fund member and need to pay a death benefit may
require asset sales that lead to an inability to generate this
income
Strategy: SMSF trustees obtain non-member benefit life
insurance cover over each member
Provides funds to pay out SMSF’s loan
Creates a fund reserve
SMSF estate planning in context
Good estate planning for SMSFs means understanding:
It’s not only about super death benefits paid from the SMSF
The interaction of the SMSF, its assets and other assets held by
the member
The provisions of the member’s will
The future of the SMSF itself