Why a SMSF Will is important in the event of divorce

Self-managed superannuation funds (SMSFs) continue to increase in popularity. There are now more than 480,000 SMSFs in existence and it is expected that 2013 will see the one millionth SMSF member. Furthermore, SMSFs now make up about one third (or $450 million) of Australia’s $1.4 trillion superannuation system and the average fund balance is around $900,000.

On a different (and seemingly unrelated) note, divorce rates are higher than ever. One in three marriages now ends in divorce and around 50% of divorcees re-marry or enter defacto relationships. This means there are now more step and blended families in existence than ever before.

But how is this relevant to SMSFs?

Because of such high rates of divorce and remarriage, it is possible for members of SMSFs not only to have their spouse and children to consider when making estate plans for their SMSF, but also an ex-spouse, step-children, grandchildren, step-grandchildren and so on.

If you said this sort of scenario is often complicated from an estate planning perspective, you’d be right. Whilst there’s no denying a step or blended family situation gives rise to additional SMSF estate planning considerations, implementing a separate Will for your SMSF (known as a SMSF Will) will go a long way to ensuring that your SMSF interests are distributed in accordance with your wishes upon death.

Traditionally, SMSF estate planning was limited to each member making a death benefit nomination (DBN). A DBN is simply a written nomination stating (usually in percentage terms) who receives superannuation interests upon death. While a DBN may be adequate in some situations, in the majority it won’t be due to a number of restrictions. Some examples include:

• Inability to make stepped nominations (e.g. in a two member SMSF where both members are spouses, each spouse can use a DBN to nominate the other to receive their benefits upon death, but neither spouse can state who receives their benefits after their spouse has died).

• Inability to nominate how SMSF interests are paid to beneficiaries (e.g. lump sum, pension, reversionary pension, in-specie transfer or a combination of these).

• Inability to specify that particular assets are received by particular beneficiaries.

• Inability to specify which beneficiaries receive taxable benefits and which receive non-taxable benefits (i.e. SMSF benefits may be taxed differently depending on the class of beneficiary).

• Inability to cater for step and blended family situations.

• Minimal scope for tax planning and asset protection.

• Minimal flexibility for beneficiaries to choose how benefits are inherited.

Generally, a SMSF Will can be drafted to address all these issues and as such, is a more effective estate planning tool than a DBN.

Given an average account balance around $900,000, a SMSF can be a big-dollar asset and is often among the most valuable upon death.

A SMSF Will can therefore be a worthwhile investment to not only provide greater certainty and flexibility, but to also provide asset protection and tax-planning mechanisms that aren’t achievable with a DBN.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.