Investment Strategy

Estate planning and SMSFs part two: common mistakes

By AMP Capital

This is the second in a two-part series that unpacks considerations self-managed super fund (SMSF) trustees need to make when thinking through estate planning issues members may face.

Very specific rules apply to estate planning and self-managed super funds (SMSFs) that are essential for trustees to follow to ensure the assets in the fund go to their intended beneficiaries.

Laws in this area are strict and complex and it’s essential to take time to think through the consequences of any decisions you make.

This is the second in a two-part series that unpacks considerations self-managed super fund (SMSF) trustees need to make when thinking through estate planning issues members may face.

In the first article we looked at how to ensure assets in the fund are appropriately directed to beneficiaries. In this article we explore how to avoid some of the common mistakes trustees make around estate planning and SMSFs.

According to AMP Financial Planning adviser Damian Hearn poorly drafted nominations are one of the major errors trustees make.

“Often the basic requirements of the SIS Act and its regulations are not met. Failure to review binding nominations which lapse after three years is also a problem for many funds. Even if you have a non-lapsing binding nomination it's important it's reviewed because members’ circumstances may change,” he says.

For instance, let’s say an SMSF member is 50 and has substantial assets inside the fund. When he set up the fund 10 years ago his children were under 18. Now, they're over 18 and have left home and are no longer financially dependent on the member.

“Those changing circumstances can warrant a change to the non-lapsing binding nomination because the children are not tax dependents. If the member died the children might be liable to pay tax that they otherwise would not have to pay if the funds were directed to another beneficiary such as his spouse,” Hearn adds.

Member preference

It's critical to ensure estate planning reduces the risk SMSF members’ wishes are not challenged on their death.

Legal challenges can overturn binding nominations in some states including New South Wales, for example. Under NSW’s Family Provisions Act an aggrieved beneficiary who feels left out of a will can seek a legal resolution.

“The aggrieved party would have to comply with the law and prove they are disadvantaged by not receiving an inheritance and a proper provision was not forthcoming based on their circumstances. But the New South Wales Supreme Court can overrule a binding nomination,” Hearn warns.

Trustees also need to consider what sort of assets are held inside the fund when estate planning. For instance any property held inside the SMSF could take time to sell on a member’s death, as could investments such as coins or other collectibles such as art.

Hearn says another consideration is whether it is still sensible to maintain an SMSF when members reach their late 70s or early 80s. Winding up the fund can make estate planning and the final phase of life simpler.

“At this point another question is whether children should become members of the fund. They would receive all the advantages of a self-managed super fund by becoming members, and it can be useful to have younger members in the fund when one member dies,” he adds.

The right choice will depend on the individual circumstances of the SMSF’s members. What’s absolutely critical is to work with qualified and experienced SMSF specialists to ensure the fund’s assets end up in the right hands when a member dies.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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