Before the 2017 superannuation reforms, often a retired couple would make a simple binding death benefit nomination (BDBN) in favour of each other and assume the surviving spouse could receive either a tax-free lump sum and/or a tax-free pension, and effectively defer any decisions around what to do once they were both gone to the surviving spouse.
Alternatively, if they were already in pension phase, they could just make their pensions auto-reversionary to each other and not even have to worry about making a BDBN. Local suburban lawyers preparing simple wills for couples to give everything to each other didn’t need to concern themselves with the niceties of self-managed super and the latest super reforms.
However, since 1 July 2017 the introduction of the $1.6 million cap on the amount that can be transferred into retirement-phase accounts means these simplistic strategies could result in the surviving spouse’s pension combined with that of their deceased spouse exceeding their transfer balance cap (TBC) so that penalty tax would apply.
While the recipient of an auto-reversionary pension has 12 months within which to reorganise their pension structures, given the deceased’s death benefit must be paid out of super, the choice is to either commute the deceased’s death benefit pension to a lump sum and/or to commute the survivor’s own pension to a lump sum or back to an accumulation account (and attract tax on earnings at 15 per cent).
If the surviving spouse does not need to take the extra cash, but they have children and grandchildren, they might put the money into a family trust, but income distributions to minor grandchildren exceeding just $416 a year would attract tax at the top marginal tax rate.
If on the other hand the deceased spouse had made a BDBN in favour of their own estate and established a testamentary discretionary trust (TDT) in their will, they could very tax effectively look after their minor grandchildren, who would be treated as adults for tax purposes in relation to investment income received from the TDT.
However, what if at the time the couple made their estate planning arrangements, their respective TBCs are well below the $1.6 million limit? To simply direct their super to their own estates may mean a missed opportunity to fully use the survivor’s TBC and maximise their tax-free pension entitlements.
Now, what if they could make a tailored BDBN to provide the surviving spouse with a tax-free pension, which, taking into account the surviving spouse’s own pension arrangements at the time of death, would not exceed their TBC, and then direct any excess death benefits to the estate of the deceased?
Under their will it could go into a TDT established for their family and the annual income could be distributed to the deceased’s grandchildren – potentially tax-free. The BDBN could also provide that if the deceased’s spouse did not survive them by 30 days, then the whole death benefit should go to the deceased’s estate.
This strategy is possible with an SMSF with an appropriately worded trust deed (it is unlikely a public offer retail fund would permit such a tailored BDBN). However, the BDBN needs to be carefully drafted having regard to the provisions of the will of the SMSF member, and vice versa (for instance, the will could provide the option for a superannuation proceeds trust to be established if at the time of death the deceased member has a number of tax dependants).
Ideally, the lawyer who prepares the tailored BDBN should also prepare the tailored TDT will so as to ensure consistency across the documentation and minimise the chance for inadvertent errors (especially where the resulting BDBN does not comply with the requirements of the SMSF trust deed and is invalid, as happened in Munro v Munro [2015] QSC 61). It is also important to check the SMSF trust deed first, in case it requires updating, so as to accommodate flexible and tailored BDBNs to be made.
Clearly, proper SMSF estate planning must be considered holistically with all the other elements of the fund member’s estate planning arrangements.