Estate Planning is generally overlooked, but when you have a Self Managed Super Fund it is important to pay attention and make sure everything is in order.
The first step is to decide on a Binding or Non-Binding Nomination.
A Binding Nomination provides the Trustee of the SMSF clear and legally binding instruction, on how you would like your Super benefits treated in the event of your death.
A Non-Binding Nomination on the other hand will only provide the Trustee a statement of your preferred treatment. As the name suggests, it is not legally binding on the trustee.
When you operate a SMSF you will be the trustee either directly or through a Trustee Company. When you pass, this role will be passed on to your Legal Personal Representative (LPR). Without clear or legally binding instructions they may not pass on your super entitlements, as you would prefer.
A good example would be if you have a SMSF with your second spouse and would like to leave some of your super to your children from your first marriage. The issue here is when you pass away the second spouse will now be the trustee of the fund and as such have the ability to direct where your super funds go. Without a Binding nomination the second spouse may decide to direct your super to themselves.
Your Super does not need to form part of your estate, it can be directed to a beneficiary straight from the fund. When dealing with Super, just having a will in place is not enough. You also need to provide the Trustee of the fund clear instructions.
A death benefit payment from your super fund to a dependent is tax-free but to a non-dependent is taxable. If you have dependents you may look to direct your super benefits to the dependents to reduce the overall tax on the estate. Non-Dependents will be tax at the rate of 15% of the taxable taxed element and 30% on the taxable un-taxed element and tax-free components will be tax-free.
Binding Nominations usually only last for a period of 3 years before they need to be redone. This rule is in place to make sure that your wishes are up to date with your personal situation. There is more work involved in keeping the Binding nominations in place. It is also important to make sure that the Binding Nomination has the correct wording and process in place. It is best to consult a professional and obtain assistance in setting it up.
If your super is in Pension phase, then you also need to consider if you would like the Pension to be reversionary. When you commence your pension you are able to nominate a reversionary beneficiary, which simply put means that the pension (income stream) will revert/continue with the nominated person. A reversionary pension is binding on the trustee as long as the receiving beneficiary of the income stream is in accordance of the SIS Regulations.
Estate planning needs to be part of your regular financial planning issues. It is important that continue to update your estate plan in accordance to changes in your personal life as well as changes in legislation.
The goal is to achieve effective transfer of your assets to your nominated beneficiaries in the most tax effective manner.
If you have a SMSF, you should ensure that at least once a year you review your estate plan.
I recommend that this be done at the same time as the financial report each year.