Superannuation Q&A

This week:

  • What if we die simultaneously?
  • Changing the fund’s name.
  • Reducing a super pension.
  • Should I have a reversionary pension?

If we both die

My wife and I have an SMSF of which we are the sole members and trustees (there is no corporate trustee). We both have binding death nominations leaving our share to each other, but if both of us were to die simultaneously, what would happen to our SMSF monies? Would it automatically go to our estates to be distributed in the terms of our wills (which is what we want) and if not, is there a way we can ensure that it does?

The best thing to do is to make provision for this in your binding nomination. One of the great advantages of an SMSF is the flexibility it provides to members with respect to their estate planning affairs. In your particular position, you are able to cater exactly for you wishes. You can draft a binding nomination so that in the event that you die simultaneously or one of you predeceases the other before you have a chance to amend your binding nomination, your superannuation is paid to your estate.

Without drafting your nomination in this way, your super may still end up being paid to your estate as you wish, however you run the risk of complications and/or delays, particularly if the person you have appointed to assume your position as trustee of the fund is in no hurry to carry out your wishes. This also highlights the point that it is very important to ensure the person that is going to act as trustee of your SMSF once you are deceased is someone with whom you are comfortable and trust to look after your beneficiaries in the way you intended.

I recommend you seek advice from a financial adviser and estate planning lawyer that specialise in SMSF advice as to how your superannuation benefits are best paid on your death (eg, pension, lump sum or a combination) so that the transition of your wealth occurs in the most suitable and tax-effective manner for your beneficiaries. You should also consider how this is passed if it is paid to your estate; for example, should it be paid directly to your beneficiaries as a lump sum or perhaps via a testamentary trust.

I also urge you to speak with an adviser and/or lawyer about the benefits of changing the trusteeship of your fund to a corporate trustee. There are a number of advantages, including some that are estate planning-related.

Changing names

We have been running our SMSF for 10 years. When it was first set up we named it after an individual member and gave the corporate trustee a different name. We want to know how we go about changing the name of the super fund to a similar name as the trustee company. What are the implications? Would it become an administrative nightmare or is it a simple thing to do?

While there is nothing too complicated about doing this, it does involve a reasonable amount of administrative work. The following will give you an idea of the main tasks that need to be carried out:

. Update the fund’s trust deed. Your financial adviser, accountant, or SMSF administrator should be able to do this for you. Alternatively, you may be able to organise it directly with the firm that provided your current trust deed.

  • The change in name will need to be registered with the ATO. If you are going to try and do this yourself, click here for the form you will need.
  • Minutes from the trustee meeting where the decision was made to change the name of the fund will need to be prepared and signed
  • Any other fund documentation, such as binding nominations and the fund’s written investment strategy, will need to be changed
  • The name under which fund’s assets (bank accounts, shares, etc) will need to be changed. While an SMSF’s assets are technically held by the trustee, they are normally held in the name of the trustee as trustee for the super fund. For example, if ABC Pty Ltd is trustee of the ABC Super Fund and it owns BHP shares, they should be held as ABC Pty Ltd ATF ABC Super Fund

While you may be able to undertake much of this work yourself, I recommend that you speak to your financial adviser or SMSF administrator about coordinating this for you to ensure that nothing is missed.

Reducing a pension

If one wanted to reduce their pension used from super, without attracting tax costs, why couldn’t they not simply contribute the portion not required back to the super fund?

Absolutely, you can move money from your pension back into the accumulation mode of superannuation (unless there is a specific restriction built into the terms of the pension prohibiting you from doing so) if you are finding that the minimum pension you have to draw is more than what you require. There is no need to contribute the money to superannuation as rolling back a portion of your pension to accumulation is not deemed to be a contribution (as you are not withdrawing it from the superannuation fund) and therefore does not count towards your contribution limits.

Having said that, you may wish to perform a “withdrawal and recontribution” strategy whereby you can effectively turn some of taxable component into tax-free component; however, you should seek professional financial advice before executing such a strategy because there are a number of areas where you can trip up, including exceeding your contribution caps.

It is important to note that you only receive a tax exemption on income and capital gains on those assets that are supporting your pension; that is, income tax and capital gains tax will apply to the assets that have been moved back to the accumulation side of your fund.

You may wish to give consideration to segregating your investments, which is where you essentially nominate the specific assets that belong to the accumulation and pension sides of your fund. Such a strategy may allow you to enhance the tax-effectiveness of your fund, particularly if you are wanting to sell some assets that have significant capital gains or have other assets that pay a high yield.

Reversionary pension?

I am taking a pension from my SMSF, and on my death I want to leave my super to my wife. I do have a binding death benefit nomination in her name, but I’ve read that maybe it should be a reversionary pension? Could you explain the difference and which one I should use?

This is a question that I am receiving more and more frequently. The option that is best for you really does depend on your circumstances and should be looked at in conjunction with your overall estate planning situation. You may, in fact, use both a revisionary pension and a binding death benefit nomination in distributing your super upon death.

A reversionary pension is where there is a condition built in to the terms of the pension you are receiving that stipulates that the pension is to automatically continue to a particular beneficiary. A reversionary pension can be a great estate planning tool, particularly as it can save beneficiaries a significant amount of Capital Gains Tax (CGT) upon the death of the original pension recipient, however not everyone is capable of putting in place a reversionary pension.

There are strict conditions on which beneficiaries can receive a superannuation death benefit in the form of a pension; for example, a child generally cannot receive a pension unless they are under the age of 18, under 25 and a financial dependant on the deceased at the time of death, or an adult child who has a disability of the kind described in subsection 8(1) of the Disability Services Act 1986.

Further, as a reversionary pension is the continuation of an existing pension, you need to be drawing a pension yourself from the fund at the time of your death, which means that a reversionary is not an option for people who have not yet met a condition of release to access their superannuation. It is also important to note that if a pension is to be made reversionary, this should be set in the terms and conditions at the commencement of the pension.

A binding nomination is a written direction provided to the trustees of the fund as to how you would like your superannuation benefits distributed upon death; for example, you may wish to leave a portion of your superannuation to your spouse in the form of a pension and the rest to your children in the form of a lump sum. In an SMSF, you really do have the flexibility to create something very unique to your particular circumstances. Again, you will be restricted as to which potential beneficiaries can receive your superannuation and in what form.

I recommend that you seek advice as to the many estate planning options you have when operating an SMSF (including how your reversionary pension should be drafted if that is what you choose) and how your wealth is best passed to your beneficiaries in the most tax effective and asset protective manner.

James Carson is a director of independent advisory firm Charlton Financial.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free