By Ian Gath, McKinley Plowman, Accountants, Perth.
Recently I was presented with a single member superannuation fund and the member had recently died.
The deceased member had done everything right, had a will and a binding death benefit nomination (BDBN) and reviewed them recently before his death, or at least he thought he done everything right.
There is two common myths with SMSFs and a deceased estate. The trustee must take direction from the estate, and the legal personal representatives are required to be appointed as trustees of the SMSF, neither of these is correct.
Whilst it may be prudent, the Trustees are not required to pay attention to the will, and the fund can continue with a single trustee for up to 6 months before is ceases to be a SMSF.
With most nominations I see, the children and wife are nominated as dependant beneficiaries, and rarely is the tax consequences of distributions from the fund taken into account, and they can be significant.
My client had been divorced and remarried, had 3 adult children to his first wife and 1 dependant child with his new wife. The will had his eldest son, who is also a trustee of the fund, and his new wife as legal personal representatives, neither could agree let alone get along. The BDBN was 30% to each adult child and 10% to the new wife. The fund had $680,000 in the member account, $350,000 taxable and the balance tax free.
The adult son was already a trustee and in accordance with Section 17A(3) could appoint a legal personal representative as the trustee, however chose not to and proceeded under Section 17A(4), which mean the fund could continue for 6 months after the members death before it failed to meet the definition of a SMSF.
The benefit must be paid in accordance with the valid BDBN and cannot be disregarded, which meant a benefit of $204,000 to each of the adult children, $68,000 to the surviving spouse and nothing to the dependant child. Each of the adult children paid $17,850 each tax, a total of $53,550.
There are a number of opportunities missed here, firstly the members young child will not see any benefits from his fathers SMSF, the tax could have been entirely avoided with some careful planning and the biggest opportunity missed is the $400,000 tax deduction using the anti detriment provisions.
Careful planning and review is essential.
Contact the author directly by telephone.