19154622 - mother handing key to daughterQ: I have a Self-Managed Superannuation Fund (SMSF) in place and I considered it to be an excellent way to pass on my wealth to my children (and grandchildren). However, I am concerned about my member balance having to be paid to my adult children as a lump sum? Can I avoid this? What options are available?

A:  Many people are shocked to discover the assets within their SMSF will eventually have to leave the fund and cannot remain within the fund. A SMSF is not like a discretionary trust which is perpetual in nature.

In practical terms for couples, this means the remaining member of the couple has the option to receive a death benefit income stream (such as an Account based pension), resulting in all of the assets being retained in the fund. This can be an excellent outcome for the remaining partner to receive the benefits of super.

When both of you pass away, your superannuation will need to be paid as a lump sum death benefit to your beneficiaries. This would typically be to your adult children directly or via your estate.  This can only be avoided if a death benefit income stream can be paid but this is limited to certain people with certain restrictions[1]. A death benefit income stream can be paid to:

  • your child under age 18, or aged 18 to 24 (inclusive) and financially dependent. However, the income stream must be commuted by the day the child turns 25
  • your child of any age where the child is permanently disabled
  • any other person who was financially dependent on the deceased at the time of death, and
  • a person with whom the deceased had an interdependency relationship at the time of death

You might be thinking your adult child could receive a death benefit income stream if they are financially dependent upon you, or held to be in an interdependency relationship with you as at the date of your death.  However, this is not the case, unless your financially dependent adult child is under age 25, or is permanently disabled.

If an adult child is financially dependent upon you, or held to be in an interdependency relationship with you, then this will avoid tax applying to the lump sum death benefit. This is another factor that needs to be considered.

The circumstances dictate whether financially dependent or an interdependency relationship exists. For example, a recent case at the Administrative Appeals Tribunal (AAT) which involved an adult child living with his/her partners did not constitute an interdependency relationship [TBCL and Commissioner of Taxation (2016) AATA 264]. This case provides an insight into modern domestic arrangements with adult children but it is important to consider these aspects as part of your strategic estate plan.  Seeking expert as your circumstances will dictate the outcome which is influenced by case law and/or prescribed superannuation regulations.

Completing a strategic plan to pass on your legacy means you will need to make key decisions about how your super and other assets will be passed onto your children (and grandchildren). Your superannuation benefit contained in your SMSF does not form part of your estate, and this is an integral part of this plan. All trustees regardless of their age need to consider what might happen and how they can plan for it.

Should your adult children who will be a beneficiary under your Will have an area of vulnerability, this also needs to be addressed. Some of these areas can include:

  • A beneficiary under a Will has gambling issues, is disabled, a spendthrift etc
  • The beneficiary is a bankrupt or has creditors.
  • The beneficiaries relationship is in trouble – a possible divorce.
  • The beneficiary is a professional or business owner.

You could consider a trust as part of your estate to afford them protection against these risks. This would mean your superannuation would need to be paid into your estate instead of directly to your adult children.

A trust you could consider would be a Testamentary Trust. A trust describes an ownership structure where the assets of the trust are held by a person or organisation (the trustee) for the benefit of other individuals or organisations (the beneficiaries).

A testamentary trust is a trust that is created within and by your Will and only comes in to effect on your death.

The beneficiaries of the trust can also include your grandchildren who can receive tax-free income up to $20,542 [2] per annum.

The trust itself can last for successive generations as it and can last up to 80 years once established (subject to the governing state based law).

To ensure your superannuation balance ends up in your estate, and within the testamentary trust you can consider all of the required documentation (such as the trust deed and a binding nomination) is in place and up to date.

As part of strategic plan, you need to carefully consider the role of executor who will need to carry out your instructions as detailed in your Will. Selecting the appropriate person with the necessary skill set and knowledge is important.

Your SMSF will be closed once all the member benefits are paid as lump sum death benefits, unless other members of the fund exist. In a recent blog post we investigated the merits of having a Family SMSF. For more information – click here.

So what is next?

Having an estate plan that takes into account your circumstances and how you will pass on your legacy is important. Seeking expert advice from financial adviser who is a SMSF specialist to advise and facilitate the creation of your strategic plan in conjunction with a solicitor should be your next step.

[1] As per Regulation 6.21 of the Superannuation Industry (Supervision) Regulations 1994

[2] Including the Low Income Tax Offset and based on 2016/17 taxation rates.