Succession planning of a self managed superannuation fund (SMSF) is inherently complicated. It is also one of the most important aspects of running your own SMSF.
When it comes to passing on your personal property, the concept of using a will is relatively well understood. When it comes to a will, there are rules that detail how a will is made and how it is signed. However, when it comes to the assets of a SMSF, you cannot make a will that effectively disposes of assets because these assets are not actually yours. They are owned by a trustee who holds the SMSF’s assets for the benefit of the members and their beneficiaries.
The reason for much of the complexity in SMSF succession planning lies in the fact that SMSF assets are being held for you rather than by you. SMSF’s are basically a special kind of trust and the rules that apply to them are the trust laws, which have an overlay of superannuation specific regulation.
How does someone with a SMSF then plan for death benefits to be distributed? There are two ways this can be done. One is to leave it to the trustee’s discretion and the other is through a binding death benefit nomination.
Leaving the distribution of death benefits to the trustee’s discretion can be a good method if the persons acting as trustees are trustworthy and prudent. It enables them to use their judgement based on the assets in the SMSF at the time, the recipients available to receive benefits, tax consequences and any other circumstances.
Many people, however, elect to make a binding direction for the distribution of their assets. This is the reason for the rise in popularity of a binding death benefit nomination (BDBN). A BDBN aims to ensure that the trustees pay the SMSF benefits in a certain way at the time of the member’s death.
There are no set laws that specify what a SMSF BDBN must contain to be valid. This means that SMSF’s are free to use a BDBN without having to conform to one set of rules. As a result of this, many BDBN’s do not work properly, especially if the document itself is not worded correctly or if it is poorly worded to fit within the SMSF’s deed requirements for making a BDBN.
The ATO does not intervene when a BDBN is not followed. The reason for this is because the ATO only supervises the regulatory aspects of a SMSF, whereas disputes over a BDBN are between private parties. Whilst a properly drafted BDBN directs where benefits should be paid, it does not pass control of the trustee to a trustworthy person. Passing control of a SMSF trustee is an important aspect of SMSF succession planning and SMSF laws do not deal with this.
Passing control of a trustee is generally contained in the SMSF deed and in the constitution for any corporate trustee. These documents vary greatly in quality and content. Therefore, it is important to understand what is in these documents and to be able to use them effectively. Questions to ask include how succession to the trustee role can occur and who has the power to appoint a new trustee? For a corporate trustee, it is also important to consider how a director can arrange for their role to be succeeded. A member’s will and enduring power of attorney are also relevant to any SMSF succession planning.
If you would like further details on any information contained in this article or you would like to ensure that your wishes are met regarding the succession of your SMSF, please contact us.