Are tailored BDBNs the magic bullet for SMSF estate planning?

From

A tailored BDBN is one which is subject to special conditions which can make it useful to deal with various modern estate planning issues.

One common condition is to impose a “cascading” succession of nominees in case the primary nominee fails to survive the fund member or fails to remain an eligible recipient of the death benefit.

Having successive nominations ensures that the member’s superannuation death benefit does not become subject to the discretion of the fund trustee and potentially wind up in the hands of someone that the member would not wish to benefit.

However, the ability to make a tailored BDBN under a retail or public offer superannuation fund is usually extremely limited.  This is where tailored BDBNs for SMSFs can come in handy.

Importantly, the SMSF trust deed must specifically provide for making a BDBN with whatever conditions necessary for the member’s estate planning strategy. The Courts strictly interpret whether a BDBN has been correctly drafted under the terms of the particular trust deed.

Also remember that the nominees under a tailored BDBN must be “SIS dependants”, for example a member’s spouse.  Otherwise, non SIS dependants can only benefit from the member’s death benefits via the deceased member’s estate.

Here’s some estate planning strategies where a tailored BDBN can play a starring role:

1. Dealing with Excess Transfer Balance Cap (“TBC”) Issues

Assuming that a member and their spouse are retired with pension balances of $1.2 million each.  If they each gave their superannuation balance to the other as a pension upon their death, then the survivor would have $2.4 million of pension benefits which exceeds the $1.6 million cap. The excess will attract additional tax.
The solution is for each member to make a tailored BDBN to use up the unused balance of the relevant TBC, and then to give the rest of the death benefit to the survivor.  Then the survivor can receive the maximum tax free pension up to their TBC as indexed, and the balance of their deceased spouse’s superannuation as a tax free lump sum.

2. Dealing with Uncertain Survivorship Issues

Suppose a member wants to ensure that their surviving spouse will be properly looked after, but their spouse is expecting to receive a considerable inheritance from their parent when that parent dies. In this event, the member would rather that their superannuation balance be distributed to their children in equal shares.
A member could make a BDBN which says that their death benefit is to support a pension payable to their spouse until the death of the spouse’s parent.  On the death of the spouse’s parent, if the spouse receives an inheritance of at least a particular value, then the death benefit pension ceases and the member’s death benefit is then divided equally between such of the member’s children who survive the member by 30 days.

3. Keeping your Superannuation Away from your Estate

If a member only wants to benefit persons who are their SIS dependants and also minimise the chance that their death benefits might go to their personal creditors, then making a “SMSF Will” style of tailored BDBN can be a very useful strategy for a number of reasons, including:
avoiding claims from business or personal creditors;

  • if their personal estate is small, avoiding the need to obtain probate of their Will;
  • avoiding the death benefit being caught up in any disputes in relation to the member’s estate or Will;
  • in States other than NSW, minimising the value of their personal estate that might become subject to a family provision claim.

4. Maximise Tax Efficiencies for both SIS and Non-SIS Dependants

Having a tailored BDBN can ensure that:

  • a member’s spouse receives a potentially tax free pension for the rest of their life;
  • on the death of the spouse, the member’s children then share the capital equally between them (potentially tax may be payable);
  • grandchildren or further descendants can benefit from their deceased ancestor’s share of the superannuation death benefits as discretionary beneficiaries of a testamentary discretionary trust under the member’s Will; and
  • any of those persons who are minors will be treated as adults for tax purposes and have access to the full tax free threshold, rather than face penalty rates otherwise payable by minors.

These are just a few examples of how tailored BDBNs can be the “magic bullet” for SMSF estate planning.

By Brian Hor, Special Counsel, Superannuation & Estate Planning

You must be logged in to post or view comments.