SMSF Estate Planning

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1 Hello, Digger's has some BIG bones for Trustees... Digger s goal in life as the SMSF Law mascot is to be able to provide you with some quick up to date information as a Trustee of a SMSF that will aid you in your role, and also help you to comply with the SMSF s Laws which are constantly changing and being updated. Here is Digger s thoughts for the week:- "NOTHING IN LIFE IS TRUE UNLESS WE MAKE IT SO" CONFUSCIOUS' DOG Firstly I just want to apologise for the lateness of this edition. Shane has been running himself ragged around the country for clients in URGENT need, assisting Mr Glenister with some in deep stuff about conditional/contractual SMSF Wills, and Shane even flew to Melbourne to sign off on a SMSF related party loan, saw the clients for 1 1/2 hours and flew back to the Gold Coast to jump in a car and drive 2 1/2 hours to the Sunshine Coast for one of his best mates 50th Birthdays! (The deal was very important for the clients. By their family trust lending the money to their SMSF to buy shares the client will save E$300K-$400K over the next 10 years as calculated by their accountant and FP, + clock up the increase in value of the shares "CGT tax free" in the SMSF!!!! If you or your family trust (or ri ch Uncle Albert) have $$$$ available to lend to your SMSF you REALLY need to talk with Shane. The tax savings can be massive!!!! Anyway Digger knew Confuscious' dog quite well. He has very smart. He made Digger realise that nothing that Digger ever writes is ever true in your life unless you make it so. Have a read. Sniff around and get fully informed. Then act. You snooze, you lose!!! Enjoy this week s Big Bone for Trustees:-

2 Hey Digger how can I understand if my SMSF advisor is up to speed on the recontributions, anti-detriments and stuff! Good point DinGo. (An intelligent alien must have taken over his body these last couple of weeks!) If you have untaxed portions in your SMSF accounts, or the desire to have your SMSF estate flow through to the kids eventually with the minimum of tax being paid you simply need to ask your SMSF advisor about how you can use the "recontribution strategy" & "anti-detriment strategy" to provide the best SMSF estate planning tax wise for your beneficiaries and see if you get a blank look, or a half baked reply. ( Digger with RS & AD in the subject line to get a copy of each article [hee, hee, hee I suppose you would be RS AD---hee hee hee. If you don't understand Digger] ). By the way, if you get a reply of "What are they?here let me read that.", or "They won't work with your SMSF, You just have to pay the tax.">>> just politely smile & me and I will see who there is in your local area that you can speak with. Grant Abbott & I regularly speak to hundreds of SMSF trustees & advisors around the country. We have a bit of an insiders view on who knows what in which areas. Hey Digger what about SMSF estate planning. How is that best done & who should I overlap with there??? Ok that's it, come out from behind DinGo whoever is there. I am talking to you who has drugged him & is using him as a ventriloquist's dummy? Is that you Mr Abbott or Mr Glenister pulling Digger's leg??? Come on, come out now! Shane was just down at Kaplan Professional last week doing a filmed interview on the subject as 'an authority' in the area OF SMSF estate planning. Kaplan is one of the largest private education providers in Australia!!! The Kaplan recording will be available on Digger's site in the coming months. SMSF estate planning is a serious business DinGo. It is just as serious as setting up survivorship for your estate outside of your SMSF. You need to do it right

3 NOW and consider all possibilities NOW otherwise you can wind up paying unnecessary taxes AND the financial & emotional costs of the fights after you have gone will far outweigh the wise investment you are making NOW.....AND the security you are providing to your spouse & kids by having the right structures in place NOW is priceless. I am regularly asked by trustees & advisors why I recommend the use of a SMSF Will for SMSF estate planning. The succinct answer is that SMSF estate planning is like any other estate planning if you do it properly NOW it can last a life time and give the very best protection for your loved ones. A SMSF Will gives the very best level of protection for your your SMSF estate. It is a detailed and comprehensive plan of where your SMSF estate is to go to, and for the best result. As with anything in life you can choose the level of protection & RISK involved in handling your affairs. You can use a cheap & nasty newsagents Will or FREE will kit from a TV insurance provider & the risk of it not being binding or effective is HIGH if it is not completed correctly. The risk of your estate wishes not being followed are HIGH if the wording isn't right. The result may be the public trustee running the estate for a commission, or your estate not going to those you want it to go to. If you have a blended family the risk is escalated even more. Remember>>>The specialist doctor saves your life & the SMSF specialist saves your life savings!!! The next step up from a newsagency Will is for you to have a mum's & dad's Will from a garden variety lawyer which does not have a full blown testamentary trust in it & which specifically gives all the gifts straight through to the beneficiaries. This is better, & the risk that it is binding & effective is less than that with the newsagency Will, but with the gifts being given directly to the beneficiaries it places them at risk with the 'tennis coach syndrome/outlaws nattering away in their ears', and if a beneficiary is under attack via family law, creditors/bankruptcy, or subject to some form of addiction or substance abuse then the asset could be lost forever. Once lost, assets & money usually will never be recovered. Prevention is better than cure & cheaper than cure in the legal world. The next step up is a full Testamentary Trust Will (TTW) which Shane uses with his family estate protection planning clients. They are less subject to claims against the estate & against the individuals who are named as potential

4 beneficiaries, because they are just that>>>potential beneficiaries & they have no absolute right to receive any assets from the estate. The risk of successful challenge against a TTW estate is significantly less than against the other Wills mentioned. The value is in the peace of mind & the long term effectiveness of the TTW & they are tax effective too! ( Digger with "TTW" in the subject line if you need an article on point.) The approach that we just considered with your Will is exactly the same one you should take when considering your SMSF estate. There are differing levels of protection & RISK involved with the protection you choose to put in place. The first level is to do nothing. If you do nothing you will often get nothing & it may well be in the lap of the gods where the SMSF estate goes, or maybe the surviving trustee of the SMSF estate will decide as to where the estate goes (after the tennis coach and the outlaws have been nattering away in their ear). If there is no surviving trustee of the SMSF the public trustee may need to be involved and will charge a commission for their work. Without auto-reversionary pensions in place, & proper tax & estate planning, your death may trigger tax consequences that with proper planning may have been able to be easily avoided. The next step is what is called a non-binding death benefit nomination (NBDBN) & they are just that. It is a wish list often put in a mum's & dad's will or in written letter form and given to the trustees of the SMSF. The trustee does not have to follow them. They could use their discretion to pay your SMSF estate wherever they are entitled to under the SMSF laws & this may well be to themself! This is not just a risk for those with blended families (as was seen in Donovan's case). Katz's case showed how one child who had control of the SMSF estate after their father's death excluded her sibling from receiving any of the father's SMS F estate, which was in accordance with the laws but not in accordance with her father's wishes for his SMSF estate. (A million dollar OUCH!) People say time & time again, "Oh it will never happen to me with my family." Which is probably what both Mr. Donovan & Mr. Katz used to say about their circumstances before they snuffed it. The grab for money once you are gone is often fuelled by the out laws & the tennis coaches of this world. ( "outlaws" = Digger's name for your "in laws"), or the partners or new friends of your loved ones, & IT CAN AND DOES GET UGLY>>>BOTH EMOTIONALLY & FINANCIALLY. The next step up for SMSF estates is the binding death benefit nomination(bdbn). To comply a BDBN must meet the requirements of S59(1A) SISA & Reg 6.17A dealing with the form of the BDBN. If you don't comply you

5 have created a non-binding death benefit nomination (as was the case in Donovan's case where the surviving trustee was the second wife of the deceased SMSF member & she kept the SMSF estate to the exclusion of the deceased member's kids from his first marriage, which was in accordance with what could take place at law but not in accordance with her partner's wishes for his SMSF estate.) It is also the better view that BDBNs lapse after 3 years, so unless it is properly diarised for it to be replaced, if they are missed the old expired BDBN is no longer binding. BDBNs most often are very basic in format and quite often just say, "leave my smsf holdings to my spouse & if she pre-deceases me to my children in equal shares." This again provides little protection from either an asset protection or a legitimate tax minimisation perspective. The ATO has also correctly acknowledged that BDBNs rate after reversionary pensions. Thus you must ensure that there is a common directional intent with your estate between the content of your BDBN & your reversionary pension otherwise the latter is likely to prevail. If they have not been properly thought out this may be at cross purposes with your intentions for your SMSF estate. If so the courts will sort that one out and the lawyers will enjoy a large share of your SMSF estate in their legal fees. The next step up, & the best way to deal with your SMSF estate so there is VERY LITTLE RISK for your SMSF estate ever going anywhere except where you wish it to, is to have the proper SMSF trust deed in place that allows you to work with all of the best SMSF estate planning strategies NOW & to effectively plan exactly how you want your SMSF estate to be dealt with via a SMSF Will linked to auto-reversionary pension clauses & whole of estate protection planning. Again S59(1A) SISA & Reg 6.17A must be complied with by the SMSF deed permitting these documents to be created and also stating that it is permitted for the SMSF Will not to lapse. To have an SMSF Will your SMSF trust deed must specifically allow for an SMSF Will to be created (which are binding death benefit rules dealing with where your SMSF estate is to go in compliance with SMSF laws that become part of the rules of your SMSF & must be complied with or a court order enforcing it may be obtained. An SMSF Will does not lapse & can be altered by you working with your trusted specialist SMSF advisor at any time & by following the correct process at law); your SMSF trust deed must allow for auto-reversionary pension clauses in accordance with the SMSF laws to be drawn in favour of the appropriate beneficiaries; your SMSF deed will allow voting rights for your SMSF estate to be limited to your legal personal representatives when you cannot act (meaning your enduring power of attorney

6 steps into your shoes if you lose your faculties & you are still alive, or your trustees & executors step into your shoes when you die). In acting at this higher estate planning level your SMSF estate can be effectively "sliced & diced" comprehensively the way you want it to whilst complying with the SMSF laws, just like using a TTW for your outside of SMSF estate! Autoreversionary pensions can be applied to all or part of your SMSF pension estate, & you can use your SMSF Will to distribute the various other SMSF assets that you own in the manner that you wish for them to be dealt with. They could go via your TTW, or they could go directly to a SMSF dependant>>> which is especially advantageous when dealing with blended families where you may wish to greatly limit any attempts at challenging your legal estate. The process is a comprehensive estate plan being put into effect to extensively deal with your SMSF estate in the most tax effective and binding way, taking away from the surviving SMSF trustees any ongoing discretionary rights for its distribution in favour of your own wishes that comply with the SMSF Laws. My clients want this high level of control in dealing with their SMSF estate. They want the say as to where their SMSF estate is to go & they don t want to leave it to the discretion of the surviving trustees of the SMSF. Further it is also be possible to have conditional gifting clauses in SMSF Wills to protect the SMSF estate from loss through being dragged into a kids family court battle or bankruptcy estate>>> eg, The deceased member s SMSF estate is to go to the deceased members dependant son XXXXX, provided that at the time of the deceased member s death XXXXX is not subject to family law property settlement proceedings or any bankruptcy proceedings, and should XXXXX be subject to any such proceedings at the time of the death of the member, the deceased member s SMSF estate is to be paid to the deceased member s legal estate. Further it may also be possible for a SMSF Will to be a mutual/contractual Will that is created with the member s spouse and where it is agreed that neither spouse will alter their SMSF Wills during the course of their life without the consent of their spouse, and that they will also not alter their SMSF Will after the death of their spouse. This happens in relation to estates outside of SMSF estates and therefore it may also be applied to an SMSF Will for the use in the SMSF estate. Accordingly the SMSF Will & estate plan is a very comprehensive dealing that is undertaken with the SMSF estate. Your SMSF estate protection planning is

7 approached at SMSF Law very carefully so that it dovetails in with your needs for any auto-reversionary pension clauses, & in taking into consideration the whole estate of the member both inside and outside of SMSF. The tax benefits for the estate are considered, as well as your asset protection needs. The process is all about you!!! This is why SMSF Law calls it>>>family Estate Protection Planning. Hey Digger that sounds good!!! Can I do my own SMSF Wull and auta-reversible penshun clauses??? Now that is the DinGo I know!!! Yes of course DinGo. We live in a democracy and it is a free world. A wise old saying is that "A fool and his money are soon parted." I have had clients and advisors who think that the SMSF estate planning process is so very simple and they are just going to do a simple NBDBN or a BDBN and all will be fine. Digger likes the saying, "The foolhardy and their own attempts at estate planning make for some interesting new case law & some very disappointed relatives". (Digger just made it up!) It is such a simple process DinGo, that Mr.Katz never got to share his $1M SMSF estate with his son, and Mr Donovan never got to share his estate with his children from his first marriage. I wonder with the wisdom of hindsight, & winding back time so they could have a second chance, if they would now enjoy investing in an expert preparing their SMSF estate documents for them??? The level of care placed on a professional working with SMSFs is VERY HIGH SUPERANNUATION INDUSTRY (SUPERVISION) ACT SECT 55 Consequences of contravention of covenant (1) A person must not contravene a covenant contained, or taken to be contained, in the governing rules of a superannuation ent ity. (3) A person who suffers loss or damage as a result of conduct of another person that was engaged in in contravention of subsection (1) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

8 As I said above, the rules of your SMSF are a critical element to your compliance with the SMSF laws. Further, S55(3) permits ANYONE who has suffered loss, not just the SMSF members, to claim for any loss arising from a contravention of your SMSF rules. The possibility for claims by intended beneficiaries against the estates of people attempting to do things that do not comply with the SMSF rules.... or against advisors poorly doing SMSF documents that do not comply with the SMSF rules & laws are boundless!!! The lawyers love you do it yourself guys! As Mr. Glenister says, you pay for his kids private school fees!!! ENJOY!!! Please learn from DinGo & the foolhardy who have gone before us and left great lessons to be learned from. Please don't be a do it yourself DIMWIT & please do not follow in DinGos paw prints. So there you go. This is just a part of what wise & tax effective Family Estate Protection Planning including your SMSF estate is about. CONTACT US NOW to ensure you are able to maximise the benefit payable to you upon retirement, or to your beneficiaries later on. Prevention IS better than cure in the real world, AND PREVENTION IS OFTEN VERY MUCH CHEAPER IN THE LEGAL WORLD. From the desk of Shane Ellis SMSF Law Shane Ellis is the Managing Director of Equityprotect & SMSF Law. He is a Senior Consulting Lawyer specialising in SMSF ESTATES & LAW, FAMILY ESTATE PLANNING, Asset Protection Structuring & Business Structures. He is one of few lawyers in Australia to hold SPAA ACCREDITED SMSF SPECIALIST ADVISOR status & ASIC RG 146 SPECIALIST SELF MANAGED SUPERANNUATION FUND ACCREDITATION. He has won Best of the Gold Coast Awards for three consecutive years for quality of legal services. He speaks regularly to business and professional groups on SMSF & Family Estate Planning; Asset Protection & Business Structures & has written regularly for the Queensland Law Society Magazine 'PROCTOR' on patterns for success in business. Shane is available to assist you on (B) (M) (E) shane@smsf-law.com.au Shane would love to speak to your clients on these matters and assist you with the growth of your business. Liability Limited by a scheme approved under Professional Standards Legislation. Legal Practitioners employed by Shane Ellis Senior Consulting Lawyer (including SMSF Law) are members of the scheme. Disclaimer: Please note that this information is general in nature and should not be relied upon for decision making or taken to be providing advice without you seeking expert opinion. Shane Ellis, Senior Consulting Lawyer & SMSF Law exclude all liability relating to you relying on this information.