Formulating an effective SMSF estate plan can incorporate many different elements. Tim Miller identifies them and highlights the importance of each and how they interact.
At this year’s SMSF Association National Conference in Adelaide, Clinton Jackson from Cooper Grace Ward Lawyers and I posed a simple question to the room: how often are you dealing with the death of a client or helping a client with their estate planning? The answers ranged from “multiple times a day” to “I can’t remember the last time” to the mischievous “what is estate planning?”, perhaps put forward in jest.
The spread of those responses tells you something important. Estate planning is not a niche corner of the SMSF landscape only estate lawyers need to worry about. It is a core part of what every SMSF professional does, whether they know it or not. And for those in the “I can’t remember the last time” camp, I’d suggest the question isn’t whether you’ll be dealing with a client death, it’s whether you’ll be prepared when you do.
Where to start
The starting point for any meaningful SMSF estate planning conversation is the fund’s trust deed and, in the case of a corporate trustee, the company constitution. These two documents are the foundation of everything and they don’t always get the attention they deserve.
The key questions are deceptively simple: who holds decision-making power in this fund and are the deed and the constitution actually aligned? In practice, deed upgrades happen relatively frequently as laws change and providers update their documents. Company constitutions, on the other hand, often date back to the day the fund was established and haven’t been touched since. The result is two governing documents can operate independently of each other and not always in a way that serves the members’ interests.
One area where this creates a very real and practical problem is trustee succession, specifically the appointment of an enduring power of attorney (EPOA) in the event of a member’s incapacity or the appointment of a legal personal representative (LPR) following a member’s death. A special purpose corporate trustee may not have a mechanism in its constitution to allow for either. It was set up to act as trustee of the SMSF and nothing else and that single-minded purpose can be a significant liability when circumstances demand flexibility.
The LPR – permissive, not mandatory
Section 17A(3) of the Superannuation Industry (Supervision) (SIS) Act provides a mechanism for an LPR to be appointed as trustee or director of the corporate trustee in place of a deceased member. The operative word in that sentence is “provides”. The SIS Act allows for this to happen. It does not require it. And the permission only runs until the death benefit commences to be paid, not beyond.
If you want a practical illustration of why this matters, look no further than Ioppolo v Conti [2013] WASC. Both husband and wife were members and trustees of an SMSF. The wife died and in her will she had stipulated her superannuation was to go to her children. Her daughters were appointed as executors of the estate. There was no binding death benefit nomination in place. Mr Conti, as the surviving SMSF member, restructured the fund to employ a corporate trustee of which he was the sole director, all within the allowable six-month window, and then exercised the trustee’s discretion to pay the death benefit to himself. The daughters challenged it. They lost. An appeal confirmed the position.
The lesson isn’t a subtle one. A will cannot bind the trustee of an SMSF. The trustee has discretion and whoever controls the trustee, controls the cheque book.
Once the death benefit has been paid and any LPR appointment has run its course, the clock on the six-month rectification period starts ticking. The fund must meet the SMSF definition under section 17A within six months of the point it would otherwise fail it and that might mean appointing a second individual trustee, transitioning to a corporate trustee or a combination of both, depending on the circumstances.
Nominations: the deed governs
There is no such thing as a standard SMSF death benefit nomination form. Every nomination in an SMSF must comply with the terms of the fund’s operative deed. Not the superannuation regulations, the deed.
Self Managed Superannuation Fund Determination 2008/3 confirmed this position and Hill v Zuda [2022] HCA 21 put it beyond doubt. The flexibility it creates is real and it’s one of the genuine advantages of the SMSF environment. SMSF deeds can provide for non-lapsing binding nominations without any of the procedural baggage that applies elsewhere. But that flexibility cuts both ways because a nomination that doesn’t comply strictly with the deed’s own requirements is simply not valid.
Cantor Management v Booth shows how specific the procedural requirements can get. The deed in that case required the nomination to be “given to” the trustee. Service was made to the registered office of the trustee company, which happened to be the accountant’s office. The court found that was valid because it was “deemed” to have been received.
Munro v Munro raises a different but equally important point. The nomination in that case was expressed as payable to the “trustee of the deceased estate”. The court confirmed the deed’s process applied, but it also drew a clear distinction between the function of an LPR and the trustee of a deceased estate, a distinction that has real tax consequences depending on who ultimately receives the benefit.
It’s also worth considering whether a nomination should be single or cascading. If the primary beneficiary predeceases the member, particularly relevant in blended family situations or complex family dynamics, a cascading nomination provides a contingency a simple single-beneficiary nomination doesn’t.
Reversionary vs non-reversionary
Too often the reversionary versus non-reversionary pension decision gets framed exclusively as a tax question. It isn’t. It is an estate planning question that has significant tax dimensions and the distinction matters in ways that can surprise clients and their advisers. I’m sure a lot will be written about Division 296 and reversionary pensions in the future.
A reversionary pension continues automatically to the nominated beneficiary upon the member’s death. For transfer balance cap (TBC) purposes, the credit to the reversionary beneficiary is the value of the pension at the date of death. However, that credit isn’t applied to their transfer balance account until 12 months after death. That deferral can be valuable strategically, but it also means the minimum pension obligations continue from the moment of death throughout the deferral period. Miss those minimums and the pension ceases – not an outcome anyone is planning for.
A non-reversionary pension ceases upon death. What’s left is a death benefit that can be paid as a lump sum, a new income stream or a combination of both. The TBC credit applies at the commencement of any new income stream, meaning there’s no deferral, and the credit is based on the value of the new pension at that point.
One area that gets overlooked in this analysis is the interaction between insurance proceeds and the TBC. Where a fund holds life insurance on a member and the pension is reversionary, the insurance proceeds land in the fund as income to the continuing pension. The TBC credit for the reversionary beneficiary is still the value of the pension at the date of death, which is the pre-insurance-proceeds figure. That can look like a ‘free kick’ on the cap and in some circumstances it genuinely is. Where the pension is non-reversionary, the insurance proceeds form part of the death benefit and the full amount, including the proceeds, is brought to account when the new income stream commences.
This distinction can be significant for high-balance members where the combination of a surviving spouse’s existing interests and the death benefit income stream creates a TBC issue. The numbers matter, the timing matters and the pension documentation needs to be right before any of it can be managed properly.
The three levels and why they interact
One of the themes underpinning SMSF estate planning is that it operates simultaneously at three levels. At the trustee level: who controls the fund, how the deed and constitution operate and what happens to the trustee structure when a member dies. At the fund level: exempt current pension income (ECPI), insurance proceeds, record-keeping and reporting. And at the member level: the nomination, the pension type, TBC considerations and pay-as-you-go withholding obligations. These levels don’t operate in isolation. A decision at one level will have consequences at the others and it’s the interaction between them that catches people out.
The ECPI rules are a good example of this. There is an ability for a fund to continue claiming the income tax exemption for a specified period after a member’s death, both before and after an interim benefit payment has been made. This means there is no need to rush the payment of benefits, which is important because the calculation of death benefit tax components, the consideration of TBC impacts and the coordination of pension documentation all take time to complete properly. Getting the ECPI right requires knowing what’s happening at the member level and vice versa.
The documents not reviewed often enough
There are five documents every SMSF practitioner should be reviewing with their clients regularly: the member’s will, the member’s EPOA, the member’s nomination of beneficiaries, the fund’s trust deed and, once a pension has commenced, the pension agreement. For most funds the honest answer is that the review cycle on at least some of those is either infrequent, incomplete or hasn’t happened since the fund was established.
The will and the EPOA often get dismissed as someone else’s problem. They’re not. A client without a valid will or an appropriate EPOA is a client whose SMSF estate planning is built on sand. The “may” in section 17A(3) has as much conviction as “perhaps” and the combination of no binding nomination and no LPR-ready succession plan is a situation that ends up in courts more often than anyone would like.
The investment strategy gets reviewed annually. The financial statements go out every year. But the documents that determine what happens to a client’s single largest asset when they die, and who controls it in the meantime, deserve at least the same attention. The case law is consistent on this point: the deed governs, a will is not an instruction to a trustee and whoever controls the fund, controls the cheque book.
When a member dies, there is no opportunity to go back and fix what wasn’t done. The instructions existing at that moment are the ones that count.
