6 reasons to update your SMSF trust deed

With the amount of changes to superannuation in the last five years it’s essential that your SMSF has a robust, good quality trust deed.

Although the rate of actual law changes has slowed in the last few years, there have still been numerous rulings, cases and new strategies developed which require an up to date SMSF trust deed to protect your interests and get the most from your SMSF.

The following six items are example areas where your current SMSF trust deed is likely deficient:

  1. Binding Death Benefit Nominations

The Commissioner of Taxation and the Courts have said that the superannuation fund trust deed – not a binding death benefit nomination form – is all important in the destination of a deceased member’s death benefits.

A recent case has seen a daughter take 100% of her father’s SMSF benefits rather than share 50/50 with her brother as required under the father’s Will because the father’s Will had no validity in terms of his superannuation benefits and the binding death benefit nomination was subject to the remaining trustee – his daughter’s discretion.

The SMSF trust deed that Superfund Partners uses for our clients allows a non-lapsing binding nomination (also known as an ‘SMSF Will’) which sits alongside the trust deed and binds the trustee on what is to happen with a deceased member’s super benefits and in some cases the assets of the fund on the member’s death.

SMSF Wills are secure, safe, certain and compliant with the superannuation and death benefit laws.

  1. Auto-Reversionary Pensions to prevent CGT on death

The Commissioner has released a ruling that states on death a member’s pension dies along with the member.  As such the tax exempt pension assets must be transferred back to the deceased member’s accumulation fund and any payment from the accumulation fund will attract 10% capital gains tax.

However with a simple auto-reversionary pension – a continuation of a member’s current pension on death will see no CGT on death if a lump sum payment is made from the continuing pension member’s account.

Many of our clients have already gone about converting their existing account based pensions to auto-reversionary pensions to escape CGT on death for their family, however the trust deed of the fund is essential to enable this strategy to be put in place.

  1. Appointing a Guardian on Death to secure your SMSF Will

Where a member of a fund is alive but has lost mental capacity they may put in place a binding SMSF ‘Living’ Will which lays down how they want their superannuation benefits to be used including:

  • Accommodation fees in an aged care facility
  • Daily home care
  • Payment to a spouse of living income
  • Hospital and other medical expenses

Without this the remaining trustees of the fund have discretion on how the member’s benefits are to be used.

For SMSF trustees using Superfund Partners recommended trust deed there is a Guardianship clause where a specific trusted person (member or new member of the fund) looks after the interests of the mentally incapacitated member to the exclusion of other trustees – ensuring security and certainty.

  1. New Insurance Arrangements

SMSF trustees must review the Fund’s investment strategy regularly and as part of that review the Trustee must consider the insurance needs of all of the Members of the Fund.

The recommended Superfund Partners trust deed includes a special section on insurance strategies which also importantly provides the trustee of the fund with flexibility on what happens to the insurance proceeds in the event of a claim by the trustee on an event arising in relation to a member.

In addition from 1 July 2014 there are some important changes to the type and style of insurances that are allowed by SMSF trustees and our recommended deed has been upgraded to take those changes into account.

  1. Changes to the Contribution Laws

The Commissioner now allows a member or other party to meet an expense of the fund and treat it as a contribution.  This could be premiums payable on fund insurance, administration expenses, etc.

Alternatively these expenses met by a related person or entity such as a family trust or member may be reimbursed or as noted treated as a contribution.  However the deed must allow this flexibility in treatment – which has been placed in our recommended deed – one of the first in Australia.

From 1 July 2013 pre-tax contributions made on behalf of a member of a fund by an employer or self-employed is not subject to excess concessional contributions tax of 31.5% but taxed at a member’s marginal tax rate less 15%.  These new and important contribution rules have been imported into our recommended deed.

  1. Bloodline transfer of Superannuation Benefits only

This new strategy included in our recommended trust deed allows the members of the fund to limit any superannuation death benefits payable to bloodline dependants and non-dependants only – either directly through the fund or indirectly via the estate of the deceased member or testamentary trust.

A number of clients have already thought about and used this important strategy which prevents the passing of your superannuation benefits outside your bloodline.  If the SMSF deed does not have this clause your superannuation benefits may be passed outside of bloodline descendants to beneficiaries such as the spouses – or even ex-spouses of your children!

Summary

A good quality trust deed is one of the pillars of an SMSF estate plan to ensure that your super benefits go to who you want them to when you pass away or lose capacity.

 

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Superfund Partners runs regular educational events for SMSF trustees on a range of topics including estate planning.  Please check our events page for our upcoming events.

Director at Superfund Partners. I love working in the SMSF space. Self-managed super funds are more than just a savings vehicle - they enable people to truly take control of their financial situation which is key to achieving happiness. Leading the Superfund Partners team is a privilege - they are a great crew and they always put others first.