Legal Tip 343: Death and SMSF Property passing to Individuals

Discussion in 'Superannuation, SMSF & Personal Insurance' started by Terry_w, 1st Jul, 2021.

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  1. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Generally, when a member of an SMSF dies the assets of the SMSF will not pass via their will. This is because the SMSF is a trust and they don’t own the SMSF assets. The dead member’s super balance must be paid out of the SMSF as soon as practical after the death and the trustee of the fund can only pay to a dependent of the deceased or to their estate. What usually happens with a SMSF with a lumpy asset is that the asset is sold and then the cash transferred to the estate or the dependents. This could cause issues where the SMSF owns a premises which is being used in a business of the deceased or a related entity of the deceased.


    It is possible to get a SMSF property to pass to a specific person on the death of a member even though the member does not own that property. This involves transferring assets of a SMSF to the estate and then to a particular person rather than the trustee of the SMSF selling those assets and cashing out.

    The fund must allow for in-specie transfers of SMSF assets to give the trustee the power to do this. A Binding Death Benefit nomination to the estate may be needed and appropriate clauses in the will.

    Here is how it could work.


    Example

    Homer is running a brothel business which he wants to leave to his son Bart. The building they are operating in is owned by the trustee of the Simpson SMSF. Homer is concerned to allow for the business to keep operating upon his eventual demise and worries that if the property is sold, the business will have to find new premises to operate, which will be very hard to find with the licensing restrictions.

    Homer’s member balance of the SMSF is $1,200,000 and the other member’s balance is $600,000 – Marge his wife is the other member. The assets of the SMSF conveniently include $600,000 worth of shares and the $600,000 building.

    If Homer dies his member balance must be paid out of the fund as soon as practical. That is $600,000 at the moment.

    Homer makes a BDBN in favor of his Legal Personal Representative, LPR.

    Homer makes his will so that Bart will receive control of a Testamentary Discretionary Trust with a single asset – the building.

    The SMSF deed is amended so as to allow for an in-specie transfer of an asset, this could even be hard wired into the deed itself. The trustee of the SMSF will be requested by the executor of the estate to pay the property over.

    This property will come over into Homer’s estate passing to the executor and then to the trustee of the TDT controlled by Bart.

    Homer has other assets which will pass to Marge and the other kids so they will not miss out. An adjustment clause in the will allows the executor to even things out so that everyone gets a roughly equal share.

    If Homer owned the business, he would make sure this passes into a separate TDT which would also be controlled by Bart. If the business was operated by a trustee then control of the trustee and trust would need to be passed to Bart, if the business was operated by a company then the shares of the company would need to be passed to a TDT controlled by Bart, or if the shares were held by a trust the control of that trust be passed to Bart.



    After sorting this all out Homer dies.

    All goes according to plan – Marge becomes the sole member of the SMSF and rids herself of having a connection with a brothel and Bart fulfills his life long dream and becomes a pimp – later he does seminars about how hard he had to work to get where he is today.
     
    craigc and Scott No Mates like this.
  2. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The transfer could be dutiable. State laws vary and there can be complex issues needing legal advice. Before making nominations. And prior to the trustee acting if a death occurs

    A reversionary pension is a further consideration. This may allow the asset to NOT depart the fund.
    There also may be testamentary trust issues to also consider in lieu of actual property passing to a beneficiary. Especially if a beneficiary is a risk. Homer may not want the business property to pass to any specific family for asset protection reasons.

    The complexity to death benefits planning is common. Important to get legal advice not financial or tax advice on this estate planning and on binding or non-binding or other benefit nominations etc