SMSF members looking to retain control over how their a death benefit is handled by a beneficiary would be better served directing the benefits out of the fund and having them handled under their will, an SMSF lawyer has recommended.
Townsends Business & Corporate Lawyers superannuation online services division managing solicitor Jeff Song acknowledged SMSFs had a number of advantages over Australian Prudential Regulation Authority (APRA)-regulated funds in the allocation of retirement savings assets upon the passing of a member via binding death benefit nominations (BDBN), but added this did not impart any control over their use by the beneficiary.
“One of the beauties of SMSFs is that members can be flexible with their directions to the trustee through their BDBNs. Subject to the SMSF’s governing rules, members can go beyond simply nominating which of their dependants will receive benefits,” Song said.
He said this flexibility was unavailable to APRA-regulated funds, which could only direct the benefits to a beneficiary and any decision about the form of the death benefit payment was at the trustee’s discretion.
While SMSF trustees could be directed from beyond the grave as to the nature of the benefit paid, such as a lump sum or pension, beneficiaries are not bound by the BDBN as to what they did with the monies, mainly due to mandatory cashing-out requirements and pension rules, he pointed out.
“For example, if the death benefits are to be paid in a lump sum, the compulsory cashing of death benefits requirement under Superannuation Industry (Supervision) (SIS) regulation 6.21 mandates the death benefits be cashed in a single lump sum or an interim lump sum and a final lump sum,” he said.
“Once in the hand of the nominated beneficiary, there is no effective control over how the money is spent by the beneficiary.
“The member could try to have control over the use of the death benefit by specifying terms and conditions the beneficiary must agree to before receiving the death benefit. However, there will be no practical way of enforcing the beneficiary’s adherence to the terms and conditions once the beneficiary receives the benefit money or property.”
He noted the absence of post-death control applied to a benefit paid as an account-based pension, on which there was no limit on the maximum amount that could be taken in any year nor restrictions to prevent the pension being commuted for a lump sum payment.
This lack of control also applied to benefits paid to a child as a mandatory commutation requirement under SIS Regulations would override any additional rules set by the member, and where a deceased’s spouse was the beneficiary there was no mandatory commutation requirement for a beneficiary pension in the form of an account-based pension.
“If the member’s major concern is having control over the death benefits after the member’s passing, there are other options for consideration, including a BDBN directing the death benefits to be paid to the executor of their estate with a testamentary trust set up in their will,” Song said.
“This option would come at its own costs, such as loss in tax efficiency and potential risk of the estate being challenged.”
