How Lumpy Assets in a SMSF Affects the Estate Plan

For the majority of Australians, superannuation is one of their greatest assets. In recent years, changes to superannuation rules and regulations have made it easier to acquire ‘lumpy assets’ in self- managed superannuation funds (SMSFs). A ‘lumpy asset’ refers to an asset that cannot be acquired in small increments, such as real estate.

It is common for businesses to fund the purchase of their premises through a SMSF utilising limited recourse borrowing arrangements and/or increases to contribution caps. Financial planners will often counsel clients on managing the risks of keeping their SMSF in compliance mode with this type of asset with the sole purpose test (positively geared) and contingency plans where valuations affect returns. But many advisors do not consider the impact of a lumpy asset on the estate plan or estate administration.

What happens to super on death and importance of Binding Death Nominations

Superannuation does not automatically form part of one’s estate on death. All superannuation funds are controlled by a trust deed. It is up to each member to complete a death benefit nomination which essentially operates to instruct the superannuation fund trustee on how to distribute superannuation on death.

In the event that an individual does not complete a death benefit nomination, the trustee of the superannuation fund has complete discretion as to who is to receive the death benefit and in what proportion between dependants and legal personal representatives. This could have the consequence of the benefit being distributed in a manner that goes against what was intended by the member.  

Accordingly, an effective estate plan will ensure that an effective death benefit nomination is in place that is binding on the trustee.

Time period for paying put death benefits

By its very nature, a lumpy asset usually cannot be quickly realised so what happens in this situation?

In broad terms, the death of a member triggers a compulsory payment situation whereby the deceased member’s super cannot remain in the SMSF and must be paid either to the deceased’s  dependants or legal personal representative as soon as practicable and generally within 6 months.

There may be circumstances where the ATO may accept a longer period for the death benefit to be paid (e.g. the validity of a binding death nomination is disputed) but the trustee must ensure it has a good reason. Lack of liquidity in the fund may not be a sufficient reason bearing in mind that superannuation laws require that a fund be able to make benefit payments when due.

Depending on the drafting of the trust deed for the SMSF, the death benefits can usually be paid as a pension (to dependants such as a spouse or child under 18 years), a lump sum benefit, or both. An asset may also be transferred in-specie upon the death of a member of a SMSF if provided for by the trust deed. However, stamp duty may be payable.

The importance of planning for lumpy assets in the estate plan

A frequently asked question is how death benefits will be paid if a member passes away but the surviving members want to retain any lumpy asset such as real property, where there might not otherwise be enough cash to pay out the death benefits. Alternatively, members might want to retain a longer term real estate investment after the death of a member to ensure value is maximised and /or the sale occurs in the best possible market conditions.

There can often be simple solutions to these problems. For instance, if the members of the SMSF are husband and wife, they can nominate each other and elect to receive the benefit as a pension which might ensure that the property does not need to be sold immediately. This of course may not work for non-death benefit dependants who cannot receive a pension.

Other options include:

  • a surviving member may make a cash contribution to the SMSF in order to pay the death benefits (subject to the relevant contribution caps).
  • An in-specie transfer of the property (or part) provided that the tax consequences are not too disadvantageous (e.g. stamp duty).

SMSFs remain an effective estate planning tool. However, proper planning is required to ensure that the risks of lumpy assets are managed not only during the life of a member but also after death. An effective estate plan will ensure that the maximum value of any SMSF property is realised whilst retaining the tax effectiveness of a SMSF structure.


The full contents of this article is only available to our members. Click here to become a member.

Already a member?

Please enter your username and password below to gain access.

Member's Login
Username  
Password  
  retrieve your password