You probably hear the terms estate and succession planning and just tune out and put it in the all too hard basket as you don’t really understand what it means. Estate and succession planning put simply is planning for when you die or in the unforseen event of something like divorce. If you haven’t got a plan for these events then the consequences could be catastrophic and very costly. These are of course very emotional times and times when we find it hard to digest information and sometimes make rational decisions. That is why it is so important to have a plan in place for the inevitable and unexpected events.
THE INEVITABLE
Wouldn’t you know it, it’s not totally straightforward. The first thing that you need to know is that the balance of your super fund does not form part of your estate as it is a separate trust account.
When a member of a super fund dies, among other things, there will be the need to deal with the balance in their super fund. This balance converts to what is known as a death benefit which has to be paid out as soon as practical, which can have its complications where assets need to be sold.
It is the responsibility of the trustee/s to ensure that this is handled correctly and guidance in relation to this is in the legislation and also the all-important trust deed. I’m not suggesting that you do this process yourself as this could be a very emotional time, and it would be therefore be wise to seek the assistance of a solicitor, accountant and your auditor to ensure that everything is handled properly from a legal and compliance perspective. However I do think it is important that you understand generally the process so you will have confidence that your advisors are doing the right thing.
A death benefit, which is paid to a beneficiary or beneficiaries, can only be paid out in three ways:
- as a lump sum to dependents;
- as an income stream to dependents; or
- as a lump sum to the estate (personal legal representative) of the member where it will be distributed in accordance with the instructions in the will.
A dependent is a spouse, child under 18 or anyone who has a disability or is financially dependent on the member who has died.
As a member of your super fund, you should nominate who your beneficiary/s will be for the payment of a death benefit. This nomination should be formally documented and signed and ensure that all the trustee/s of your super fund are given the document so they are aware of your wishes. There are different types of nominations ranging from reversionary, binding death benefit nomination and non-binding death benefit nomination so seek advice in relation to which would be suitable for you.
THE UNEXPECTED
“That won’t ever happen to me” mentality stops so many people for planning for when and if the “….. and they lived happily ever after” doesn’t happen. The statistics show that one in three marriages ends in divorce and de facto relationships enjoy the same rules that govern marriage. Another fact is that the majority of self-managed super funds involve either married or de facto couples and which are often referred to as Mum and Dad funds so separation and divorce do happen to couples with self-managed super funds.
Statistics also show that people are getting married later and staying married longer before becoming divorced. This means that there would probably be a larger pool of assets including the money invested in super that needs to be split and so the stakes are high.
You really do need to have a contingency plan in place in case the unexpected does happen. You may think that you don’t need it and if you don’t – how great is that? If you do however, and have a plan or resolution strategy in place then this will cut out a lot of heartache for all concerned in what is a very emotional time. The best place for this is in the SMSF trust deed.
When a couple separate or divorce and a property settlement process is initiated this will involve all the marital assets and this will include the assets of the super fund. The property settlement process will decide the amount that each party will receive and this can be a dollar amount or a percentage split. Once that is decided then further decisions can be made as to whether the assets of the super fund need to be split, transferred or sold. There are as many different scenarios as there are relationship break ups so I won’t go into much detail here.
If there is agreement that the assets need to be split then this needs to be effected as soon as possible and these need to be either rolled over into an account in the relevant member’s name in the super fund or transferred out to another super fund. It may not be possible to effect this transfer immediately because, for example, the split involves business real property that needs to be sold or is an integral part of the business of one or more of the members. A delay in the transfer is acceptable if there is an agreement in place whereby no benefits will be paid till the transfer is affected.
Some or all of the members may elect to stay or decide to leave the super fund. The decision to stay may be as a result of assets not being able to be easily split. The example that I gave before of the business real property would fit into this category.
Having a divorced couple remain in a self- managed super fund could have real issues depending on how acrimonious the separation and/or divorce was.
As always there are the taxation implications which would be just as many and varied as the number of different scenarios that would be possible in this area. I guess I don’t have to really tell you that you should seek advice from those trusted advisors.
DON’T FORGET ….
There are of course things that you need to ensure are in place so that your self-managed super fund continues to comply with the rules as set out in the legislation and of course the super fund’s trust deed. Things to remember are:
- if you leave the super fund then you need to resign as a member and individual trustee or director of the corporate trustee
- prepare minutes for the super fund for all the decisions being made and the actions being taken
- change the trust deed to correctly reflect the trustee information
- notify the ATO of the change by submitting the relevant form
- where there is a corporate trustee, notify ASIC of the changes to the directors – yes there will be a form to do this
- if there will only be a single member ensure there is either a corporate trustee or another non-member trustee
- if the super fund has individual members then the ownership details in relation to any assets will need to change
- if all members are leaving the super fund then the fund will need to be wound up
Audrey Dawson in Author of “Holy Crap! Where’s My Super Gone?!
Self-Managed Super Made Simple” and Director of Super Confidence
www.superconfidence.com.au