Set up future generations through estate planning: Forrester Cohen

Set up future generations through estate planning: Forrester Cohen
Set up future generations through estate planning: Forrester Cohen

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People who buy property through a self-managed superannuation fund need to consider what to do with the asset after they have retired and how to pass it on after they have passed away. 

SMSFs allow for assets to be handed from one generation to another as an inheritance, but there are regulatory constraints and taxes to take into account. 

Reserves after retirement

At retirement, an SMSF member may start a pension from their fund, in which case the balance will reduce over time. The fund may have sufficient cash flow to support pension payments but as the person ages the proportion of the fund’s balance that must be paid out as a pension increases so it becomes more likely that the property will have to be sold to support the pension. 

If the family has other sources of income, and doesn’t need to draw a pension from the SMSF, it is possible to leave the assets untouched by keeping the fund indefinitely in what’s known as the accumulation phase. 

SMSFs in accumulation phase do not issue a pension but the income and capital gains made within the fund are taxed at 15%, while they would be tax free if the SMSF was paying a pension. For some retirees, the 15% tax is still less than they would pay if they held the property in their own name so there can be advantages to holding it in the SMSF to pass on as an inheritance.

Inheritance

When an SMSF member dies, the assets held in their fund do not automatically form part of their estate. The estate can access the assets and distribute them according to the person’s will but conditions in the SMSF’s trust deed and superannuation laws must also be satisfied.

There have been cases in which surviving SMSF trustees have been able to go against the wishes of the deceased fund member. SMSF members should seek legal advice on how to avoid that risk.

SMSF members may provide their fund with a binding death benefit nomination, which gives direct instructions on who should receive the deceased member’s share of the fund’s assets but there are restrictions on who can be named as the recipient. Whether such a nomination is appropriate will depend on the fund member’s personal circumstances. 

Relationships matter

The way in which beneficiaries receive their inheritance depends on their relationship with the deceased SMSF member.

People who are in what’s classified under superannuation law as a dependent relationship with the fund member can receive their inheritance payment as a lump sum or a pension from the fund. People who are not in a dependent relationship must be paid a lump sum. 

Dependants can include a spouse, de facto or ex-spouse, as well as children who rely on the person for necessary financial support or are aged under 18 years. Other people may qualify as being dependants of the deceased but adult children typically do not.

The amount of tax each beneficiary pays on the inheritance also depends, in part, on whether or not they are a dependant of the deceased. Other factors also influence the amount of tax due, including the tax structure of the fund itself.  

In some cases, a property held through an SMSF can be passed from a deceased fund member to their beneficiaries without leaving the fund. The way the SMSF is structured affects how easy and how costly it is to do this. 

SMSFs can have up to four members. They can be established with individual trustees, where each member is also a trustee, or with a corporate trustee where each member is also a director of the trustee company. 

If the fund was established with individual trustees, the titles on the SMSF’s assets and the individual trustees must be updated when a fund member dies. State governments and any administration systems the SMSF uses may charge fees for these changes.

Funds with a corporate trustee can change their members by updating the corporate trustee’s directors. The fund must notify the Australian Securities and Investments Commission and the Australian Taxation Office of these changes but there is no change to the title of the SMSF’s assets.

Are other vehicles better?

Holding property through an SMSF is just one way to pass the asset on through the generations. Other options include owning the property directly, or through another tax structure such as a company or family trust. Each has its advantages and drawbacks. 

SMSFs can be tax effective in some situations but there may be simpler and less costly alternatives. Each family is different and what’s best will vary depending on individual circumstances. Seek professional advice. 

 

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Smsfs Investment

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