Estate planning - do properties need to be sold in SMSF to satisfy beneficiaries?

Hi All

Question re a mainly property based SMSF

Where a SMSF has husband and wife as members and one member passes away can the survivor leave the deceased partners benefits within the SMSF or do the benefits need to be liquidated and paid out.

In addition if the beneficiary is not the surviving member is there any way of keeping the property intact.

Recently had a discussion with someone with this setup who thought his kids could just inherit the properties without any hindrance. I suggested that at the least the properties could be transferred to beneficiaries name but with associated hurdles including stamps and CGT considerations. He swore black and blue that he had received all sorts of professional advice that it could be done but I suspect he hadn't really understood all the information.

 

Dont know the rules for sure but with a binding beneficiary nomination, can assets be passed froma smsf to a testamentary trust via the estate?

 

Happy to be corrected, generally death benefits are required to be 'cashed' but that doesn't mean the fund has to sell them - assets can be transferred in specie.

Obviously though, valuations are something that will need to be agreed upon, and taxes may need to be paid.

If there is insufficient cash to pay tax liabilities then assets might need to be liquidated by the fund prior to paying out the death benefit/s.

As to the other question by @Trainee, but the BDBN can only nominate an eligible beneficiary - which does include the executor LPR of an Estate. But that BDBN can't bind the Executor, it can only be binding on the SMSF trustee. So I'm thinking there would need to be a direction in the Will to create the testamentary trust.

 

My understanding - a simplistic one - is death benefits are required to be paid. With this in mind, my Will establishes a superanuation death benefits proceds trust as a sub-trust and the BDBN has my Estate as the nominated beneficiary.

Mind you the fund only holds shares and cash plus I have no dependant beneficiaries.

Or throw your hands up in the air and work along the lines "Stuff it. I'm dead, it's nothing to do with me. Let them sort it out."

 

Death is a complexity cashing event. The deceased persons death benefits must be paid out and a journal entry is not adequate. So if a smart does not have enough cash or liquid assets this could mean property has to be sold.

 

Note that life insurance doesn't help with this as the insurance is death benefits of the deceased so it must come out of the fund.

Ways to keep property without the fund needing to sell might be to pay out the death benefits as a pension, where possible, and or for the surviving member to make a contribution to the fund so that it might be able to use this to pay out the death benefits and/or to bring in new members.

Legal advice is needed.

 

Its not straight forward to address death benefits. Its essential all funds with property consider the issue of death of any one member or more than one. Death can be fatal to many strategies. A limited recourse borrowing facility may also further complicate matters as loan repayment may need to be considered.

If the member who dies has a reversionary pension its very different to a accumulation benefit. Non-reversionary pension benefits (ie either accumulation of a pension that is NOT certain of the reversionary provisions) MUST BE CASHED according to SIS Reg 6.21. Note the word cashed. Its doesnt say inspecie transfer. This rule can be a nightmare if suitable prior planning wasnt considered. This is often common to some DIY funds where the members did not seek independent advice. The shortcut may become costly and see the value of the death benefit exit the concessional super system without ability for it to return. A reversionary pension strategy may avoid the cashing rule and avoid the need to dispose of the property through sale. This then may open a further problem which I call the yield problem. If rental income is 3% and costs take out 1% then the fund may only have 2% income but be required to pay a minimum 4% pension....It will not have suitable liquidity maybe. Its why diversification matters. And liquidity.

Changes to super laws limit how insurance benefits must be handled and this limits former strategies that could for example repay a SMSF debt through use of reserves which are now not permitted. However it may (or may not) be possible for the SMSF debt to be refinanced from the death benefit released to the survivor. Another strategy can be to roll in adult children as new members subject to the 4 member limit.

Both legal advice by the trustee / LP and also financial advice should be obtained as early as possible.

This problem is often a sign that early prior planning for death benefits was not considered.

 

On a related issue Terry - Have a look at joint tenancy and downsizer rules. Could a will create a eligible contribution ? I think it only works on a joint tenancy (not TIC ?) since a deceased cant contract. Read TR 2010/1 too.... I see nothing that limits a contribution arising on death paid after death excepting age limits. If insurance can be credited after death why cant a right to be paid $300K in return for the joint property interest ?

Its been something I keep thinking about.