SMSF industry warns about death of a member fallout

by |
If people don’t properly address the death of a member as part of their estate planning of a fund, the consequences could be far reaching and messy.

Graeme Colley, the director of technical and professional standards at the SMSF Professionals’ Association of Australia (SPAA) told Wealth Professional the importance of planning for the death of a member in an SMSF fund before it’s too late.

He’s seen three recent cases where things “weren’t done properly” and the surviving fund members ended up in court.

“I think the main issues are around who remains as the trustee of the super fund, and the next part is the binding death benefit nomination (BDN), and the way pensions are paid out,” he said.

The BDN gives specific instructions as to who will receive pay-outs from the fund upon the death of a trustee. If there is no BDN, the remaining trustee can decide what happens with the benefit, and this has the potential to cause major rifts, especially within blended family situations, said Colley.

“The benefits may end up being paid to someone you don’t intend,” he said. “There have been three cases over the past few years where the BDN was invalid because it wasn’t signed properly, for example.”

There has also been debate over what should happen in the case of the death of a member who has both a reversionary pension (one that automatically continues to a nominated person or dependant upon the death) and a BDN.

But Colley said irrespective of whether there is a BDN, the reversionary pension takes precedent.

He said advisers need to try and fill these knowledge “gaps” within SMSF estate planning by working with their clients to ascertain what their intentions are, making sure the policy is reviewed after any life changing event such as divorce, ensuring up-to-date trustees are in place, triple checking the BDN is valid, and looking at whether the client has a reversionary pension or non-reversionary pension in place.

Colley also said solid SMSF estate planning is particularly vital for younger trustee members, usually those under 50, even though this age group typically don’t think as much about the possibility of dying.

“They’re the ones who have debts and young families and need to keep those families in a reasonable position if they were to die,” he said. “These recent court cases show if you don’t do things properly you may end up in a real mess.”


Hundreds of millions of dollars to be saved in financial services

When your client should exit their business

Concessional contribution cap must keep on rising: SPAA