SMSF succession planning

Succession planning in a self-managed super fund (SMSF) should be an important consideration for all SMSF members. With the right planning, a smooth succession can be achieved with minimal costs and administrative hassles upon the death of a member. Conversely, where planning is not undertaken before death, there may be uncertainty as to whom death benefits will be paid to, as well as a range of unexpected attendances for the remaining trustees (or directors of the corporate trustee).

This article will outline some of essential planning strategies that members should undertake in order to achieve a smooth succession. It will also outline the legal framework surrounding the death of an SMSF member. 

Control of trustee after death

A member ceases to be an individual trustee or director of a corporate trustee upon their death. As a result, the SMSF will not be a ‘self managed superannuation fund’ for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS) – see ss 17A(1) and (2). However, SISA gives a six-month window from when the fund ceases to satisfy the usual member trustee rules to rectify its trusteeship (see SISA, s 17A(4)).

A legal personal representative (eg, an executor) can be appointed as a trustee (or director of a corporate trustee) in place of a deceased member for the purposes of continuing to meet the definition of ‘self managed superannuation fund’. This means that the six-month window will be in addition to the period that the deceased member’s legal personal representative may hold office in place of the member. The legal personal representative should usually cease as a trustee or director when the death benefit commences to be payable. 

SMSF deed

The SMSF’s deed governs when a member ceases to be a fund member. A common time for this is upon the death of a member. The deed will also contain provisions which govern who (if anyone) will have the power to appoint a new trustee upon the member’s death. This is a particularly important mechanism if there is a single member fund with two individual trustees.

We note that an SMSF deed will be more important for succession planning where there are individual trustees, and this should provide clarity on whether a majority or other voting threshold is required for member decisions. If there is a corporate trustee, these steps would usually be set out in the company’s constitution. 

Death benefits

A binding death benefit nomination (BDBN) refers to a direction (or ‘nomination’) made by a superannuation fund member to the trustee of the fund. The direction instructs the trustee who to pay death benefits to. If validly made, the direction should be binding on the trustee. Effectively, it is a will for a superannuation fund.

There is no legislative right for a fund member to be able to make a BDBN. Rather, the member is only allowed to make a BDBN if the governing rules of the fund provide for it (SIS broadly provides an exception for a binding direction to trustees for BDBNs).

An auto-reversionary pension refers to a pension that was set up with a specific nomination that provides that on the death of the pensioner, the pension continues to be paid (ie, ‘reverts’) to another person who is usually their spouse or a child under 25 years of age. 

Hard-wired deeds

‘Hard-wired’ SMSF deeds (which are also referred to as a ‘death benefit rule’) can provide an SMSF member with a greater level of certainty as to who their death benefits are to be paid to after their death.

For example, a husband could set up an SMSF to provide for their second spouse and hard wire into the actual trust deed that death benefits (such as a pension) are payable to that spouse upon his death.

Also, other measures should be put into place to ensure that the hard wiring works effectively. These include contractual arrangements (such as a mutual wills agreement), wills and other estate planning documents and a restriction to varying the trust deed.

Hard wired SMSF deeds can be more costly due to the substantial tailoring that may be required. They nevertheless can be an important part of the member’s succession planning – particularly where they wish for a separate income stream to be provided to a second spouse. 

Tying it all together

SMSF succession planning involves the following:

• A clear nomination as to whom death benefits of the member shall be paid to. This should be supported with documentation such as pension documents and a BDBN. Some may also want a hard-wired SMSF deed;
• Appropriate succession as to who will control the trustee of the SMSF.

However, an SMSF may only form part of the member’s overall succession planning. It is important that their will, powers of attorney and any other estate planning documentation (such as a mutual wills agreement) align with the way they want their superannuation benefits to be paid. 

Daniel Butler is the director, and Nathan Papson a lawyer, at DBA Lawyers.