Many SMSF Trustees are aware of the importance of estate planning for the proper distribution of assets after their death. However, not all of them realize the significance of planning for a smooth transition of their fund and super benefits when they pass away.
In a small business, a comprehensive succession plan can mitigate the risk of business failure in the event of a key person's death. Surprisingly, many SMSF trustees lack such plans despite their substantial assets. So, what elements should an SMSF succession plan encompass?
Succession Planning vs. Estate Planning
While both estate planning and succession planning are crucial for determining the destiny of financial assets after one's passing, they encompass different activities:
Estate Planning
Estate planning involves deciding who receives your assets upon death and in what form (e.g., cash or shares). Regarding super death benefits, this might entail a lump sum, reversionary pension, or a combination.
For an SMSF, estate planning is a subset of the broader succession planning process for both the fund and super death benefits. Developing a comprehensive SMSF succession plan well in advance is crucial to ensuring your wishes regarding super benefits are honored posthumously.
Succession Planning
Succession planning entails planning who will oversee your SMSF after your demise or incapacitation. Effective succession plans facilitate a seamless transition of SMSF control and safeguard your instructions regarding benefit distribution.
A well-executed succession plan also minimizes administrative and compliance issues within the SMSF following your passing, reducing the likelihood of oversight in reporting and compliance obligations, such as transfer balance account reporting.
Additionally, proper succession planning ensures certainty in benefit payments and enhances the ability to distribute these payments in a tax-efficient manner.
The Importance of a Succession Plan
Merely having a detailed will or death benefit nomination is insufficient to guarantee your super assets are distributed according to your wishes. Due to the trust deed of your SMSF taking precedence over your will, the remaining or newly appointed trustees hold sway over the distribution of your death benefits.
Cases like Katz v Grossman (2005) and Wooster v Morris (2013) underscore the critical role of the person controlling an SMSF after death in determining the subsequent distribution of super benefits.
Katz v Grossman (2005)
In the Katz v Grossman case, the dispute arose between siblings Daniel Katz and Linda Grossman over the control of their deceased father's SMSF. The father, Ervin Katz, had left a substantial amount of his wealth, approximately $1 million, in his SMSF. His will stipulated that his estate should be divided equally between his two children.
However, the complication arose because Linda Grossman, who was already a trustee of the SMSF, appointed her husband as a co-trustee after their father's death. This move effectively gave her control over the SMSF. Despite the father's will, Linda decided to distribute the SMSF benefits in a manner that favored her, disregarding the equal division intended by her father.
The court ruled in favor of Linda Grossman, highlighting that the control of the SMSF and the distribution of its benefits were governed by the trust deed of the SMSF, not the deceased's will. This case underscores the importance of ensuring that the control of an SMSF is clearly defined and that succession plans are in place to honor the deceased's wishes.
Wooster v Morris (2013)
The Wooster v Morris case further illustrates the complexities of SMSF succession planning. This case involved the dispute between Susan Wooster and Kerry Smoel, the daughters of Maxwell Morris, and Patricia Morris, Maxwell's second wife.
Maxwell Morris had made a binding death benefit nomination (BDBN) directing that his SMSF benefits, amounting to approximately $930,000, be paid to his daughters. However, after Maxwell's death, Patricia Morris, who was a co-trustee of the SMSF, appointed her son Nathan as a co-trustee and subsequently changed the structure of the SMSF to appoint a corporate trustee controlled by her.
Patricia then claimed that the BDBN was not binding and paid herself the death benefit. The daughters contested this in court, and the court ruled in their favor, affirming that the BDBN was indeed binding. The court also decided that Patricia could not use the SMSF's assets to cover her legal costs, ensuring that the daughters received the full benefit as intended by their father.
This case highlights the importance of having clear and enforceable succession plans and BDBNs to ensure that the deceased's wishes are honored. It also demonstrates the potential for conflicts of interest when control of an SMSF is not clearly defined and safeguarded.
To ensure your SMSF is managed according to your wishes, it's essential to have a robust succession plan in place. Don't leave your super benefits to chance. Contact Andre at Wealth Effect Group today. We have offices on the Gold Coast and in Melbourne, or you can schedule a team meeting by clicking the link.
Let's secure your financial future together!
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