When it comes to estate planning, most clients know how important it is to have an up to date will. What a lot of clients don’t know is that their biggest asset may not be covered by the will.
It used to be said that the family home was the biggest investment most people ever made, but that’s not always the case anymore. These days, your biggest investment could be your superannuation fund, and it’s not an estate asset.
A superannuation fund is a type of trust that holds payments made by your employer, and any contributions you make, on trust for you as the beneficiary. This trust is under instructions from you to invest that money so that it can support you in your retirement. Unlike other types of trusts, the circumstances in which a superannuation fund is able to make payments to you are strictly controlled by legislation.
As a trust, the property in your superannuation is not owned by you. The trustee has legal title of the property and discretion to use the funds and make payments to you subject to any instructions you have given, and the relevant legislation. For this reason, your superannuation is not an asset of your estate and requires separate directions to provide the benefit to others when you pass away.
Most public and industry superannuation funds provide for a member to make a Death Benefit Nomination. The nomination can be made on a binding or non-binding basis and, depending on which type of nomination you make, the trustee either must follow your instructions or may take them into consideration when paying the death benefit from your superannuation fund.
If you have a Self-Managed Super Fund (SMSF) the payment of a death benefit is dealt with in the trust deed of your SMSF. There are two useful ways in which the SMSF deed can be structured to deal with your superannuation. The trust deed can mandate that a nominated beneficiary receive the death benefit payment, or it can give a nominated person such as your executor or the trustee of the SMSF the discretion to decide who should receive the benefit.
The option you select for your SMSF has an important impact on the tax consequences of the distribution of your superannuation. If you give the trustee or another person the discretion to decide how and to whom the amount is paid it can be directed to minimise tax and maximise the benefit to your family, such as by being paid into the superannuation of your spouse or to a trust fund for your minor children. You can leave guidelines in the trust deed of your SMSF to help ensure the benefit is given in the most efficient way possible.
You should ensure you have a current Superannuation Death Benefit Nomination.
If you have superannuation with a public fund, your binding death benefit nomination with a Superannuation Industry (Supervision) Act regulated fund will expire after 3 years (Regulation 6.17A SIS Regulation).
If you have superannuation with an SMSF, make sure the nomination complies with the requirements of your SMSF trust deed, that can require particular words or signing , for example, two witnesses to the nomination.
High Value Individuals often choose to make a “testamentary trust will” (including a discretionary or family trust in the will) as these have asset protection and potential tax benefits. It is critical that you structure the testamentary trust will correctly to ensure superannuation death benefits can be applied with maximum tax effect.
The decision is not straightforward. The appropriate nominees for, and form of, your Death Benefit Nomination dependants or your estate) will depend on expert financial, superannuation, tax and legal advice.
The key people that can assist you decide about each aspect are set out below and you will need advice from all those people to make the correct decision:
|Financial consequences for you, your estate and beneficiaries||Financial Advisor|
|Appropriate Nominee(s) such as spouse, dependant, estate||Super/Tax Advisor|
|The legal form of the Nomination||Legal Advisor|
Remember, after the family home, Superannuation is often your largest asset, and it is not an asset in your estate. The lesson: get good estate planning advice from your financial advisor, your superannuation and tax advisor, and from your legal advisor. Get the advice now, because no advisor, no matter how good, can predict the time when it will be too late to make the correct decision.
Contact Peter McNamara today for estate planning advice.