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The most common type of pension now held within SMSFs is the account-based pension, but, when it comes to estate planning, it is critical to ensure your pension is reversionary to avoid the extra paperwork.

When you commence a pension in a SMSF, as long as the member withdraws the minimum amount or thereabout (minor honest mistakes are allowed), the fund assets earning income to support a pension will not be subject to any tax including capital gain tax. There is no maximum amount which a pensioner can withdraw and the frequency of pension payments are determined by the trust deed of the fund.

When an account-based pension commences in a SMSF at any time other than 1^st July, the pensioner must withdraw at a minimum amount based on a particular percentage factor of the purchase price of pension, pro-rata, before 30^th June in the first year.

Every year minimum amount is based on the age of the pensioner on 1^st July and minimum pension payments must be withdrawn based on the percentage factor and balance as on 1^st July each year. Percentage factor are listed in Schedule 7 of SIS Regulations.

If the pension is not a reversionary and the recipient passes away, it will stay in pension account of the member, till it is paid out as a lump to death benefit beneficiaries nominated by the member when he was alive.

If the death benefit nomination (DBN) is a binding one then the remaining trustees have no discretion in paying the death benefit of the member to whosoever the member nominated in DBN, however if the DBN is non-binding then the remaining trustee may consider the DBN but may ultimately decide who should get the death benefit of the member. Binding DBN in a SMSF can be for an in-definite period or can lapse after a certain period of time if the trust deed of the fund so directs.

Remember, if the trustee doesn't have a DBN at the time of death, that is, there is no Binding or non-binding DBN in place; trustees can basically disperse the account balance in any way they like, with reference to the person's relationships, including any dependents, at the time of death. If you want to learn more about binding death nominations,click here.

If there is DBN in place, one choice the trustee can make is simply to pay the account balance to the person's estate (to the legal personal representative - LPR) so it can be dispersed in accordance with his or her will along with other non-super assets.

However, as we've reported previously in this newsletter, family breakdowns can often result in monies being dispersed against the deceased person's wishes and sometimes to the detriment of their surviving spouse or kids from previous marriages etc. A member must devote some time to estate planning issues at the time of commencing a pension.

Members can die when they are drawing a pension or when they are simply accumulating. The SMSF trust deed should direct the remaining trustees on what action they should take at the time of the member's death in both situations. Some SMSF trust deeds are deficient and confusing or worse are silent on this issue. We believe a good trust deed must be flexible and allow the remaining trustee to do whatever is permitted by legislation and must provide step-by-step guide to remaining trustee in administering the members benefit for proper estate planning purposes.

When a pensioner (a member drawing a pension) dies, in most cases the spouse of the member is the remaining trustee of the fund. If your trust deed allows, the remaining trustee (spouse of the pensioner) may be able to commence a pension from the benefit of the pensioner. Our SMSF trust deed has that option.

But some SMSF trust deeds do not allow this to happen and the remaining trustee has no option, but to withdraw the benefit of the spouse out of the super system. There could be a problem because when you withdraw monies from the super system -  there are strict restrictions and limitations on who can contribute and how much you can contribute back into the super system.  For example if you are over 65, you should be working (40 hours in a consecutive 30 day period) and the maximum you can contribute in a financial year is only $150,000.

Another option is to make the pension reversionary at the time it is established. That means that upon death of the pensioner, the pension will automatically revert to the reversionary beneficiary nominated by the pensioner at the commencement of the pension. Advisors should also ensure that there is no Binding DBN which contradicts the automatic reversionary pension, in other words, the binding DBN nominates a person other than the reversionary beneficiary of the pension. This is less susceptible to legal challenge following the original pension recipient's death.

In the case of an SMSF, make sure the SMSF allows for the commencement of an account-based pension. Some older deeds, older than 2007, may not allow these pensions to be commenced from a SMSF. If your deed doesn't, you can use our system to update your SMSF deed, click here to learn more.

A pension agreement is a legal document between the member and the trustee of the fund and terms such as reversionary beneficiaries are clearly spelled out and agreed upon in this agreement. To learn now to order a pension agreement, click here.

Reversionary beneficiary has to be nominated by the pensioner at the time of setting up the income stream. The initial pension recipient simply nominates who they would like the pension payments to revert to in the event of their death. This means that at the time of their death, the pension doesn't stay in SMSF till it is paid out as a lump sum - but simply remains in the SMSF with pension payments now automatically being made to the nominated reversionary beneficiary.

The beneficiary of a reversionary pension is the person who will continue to receive the income stream once the initial pension holder dies, can only be one of the following:

1.            A spouse

2.            A person living in an interdependency relationship with the deceased

3.            A dependent child under the age of 18 or between 18 and 25 if still financially dependent on the deceased (including a step child)

4.            Another person who was financially dependent on the deceased

Our online system makes it easy to commence an account-based pension, it is for $165 and includes a PDS and a pension agreement, including the option of making the pension a reversionary pension. Using our pension agreement makes it much less likely that the SMSF member's wishes, in relation to who benefits from their super savings, will be subject to a legal challenge.

There are clear benefits to set-up the pension with a reversionary pension beneficiary due to  ease of allowing the pension to revert and continue to the dependant without the headache of additional paperwork in the payment of death benefits and the ability for the reversionary beneficiary to continue receiving the pension.

Note that the reversionary pension beneficiary must be a member of the fund at the time of receiving reversionary pensions; the dependant must also join the fund and become the trustee of the fund if the pensioner who has died was the sole member of the fund and the sole director of the trustee company. To learn how to add a member to the fund, click here.

The minimum amount paid to the reversionary beneficiary will depend on whether the pension automatically transferred to the dependant under a reversionary pension agreement or whether the trustees used their discretion to pay a pension to the dependant. If the pension automatically reverted on the member's death, the minimum is the same as that which applied to the late member for that particular financial year. No recalculation is done at death.

The trustees must ensure the annual minimum amount was paid either before the death of the late member or after the member's death to the reversionary beneficiary. The minimum requirement can also be satisfied through a combination of payments to both members that add up to the minimum amount for the financial year in which the pensioner died. The pension is then recalculated the following 1^st July, based on the age of the reversionary pensioner.

If the pension is paid at the discretion of the trustees then it is a new pension and is calculated based on the age of the reversionary beneficiary and the value of the death benefit, as well as the proportion of the year it is paid. So if the member dies six months into the year, half the minimum must be paid as if a new pension commenced on 1st Jan.

As you can see the rules on death of SMSF member are complicated and we can only stress that advisors use a SMSF trust deed which is not only flexible but also guides the trustees on steps to take for the best outcome for the surviving family. To update your SMSF deed to ours, click here. We also offer bulk discounts where an advisor can update all their clients trust deed to our SMSF trust deed. To learn more about bulk discounts, click here.  

 A priest was being honoured at his retirement dinner after 25 years in the parish.

A leading local Accountant, who was also a member of the congregation, was chosen to make the presentation and give a little leaving speech at the dinner.

He was delayed so the priest decided to say his own few words while they waited. 'I got my first impression of the parish from the first confession I heard here. I thought I had been assigned to a terrible place. The very first person who entered my confessional told me he had stolen a television set and, when stopped by the police, run into the police car, he had stolen money from his parents, embezzled from his place of business, fudged up the employer books and gambled the money away. I was appalled. But as the days went on I knew that my people were not all like that and I had, indeed, come to a fine parish full of good and loving people.'

Just as the priest finished his talk the Accountant arrived full of apologies at being late. He immediately began to make the presentation and give his speech.

'I'll never forget the first day our parish priest arrived, 'said the Accountant.' In fact, I had the honour of being the first one to go to him in confession.'

According to the ATO, there are four steps which need to be completed when winding up an SMSF. It can be a complicated business but there are resources and expertise available to make each step much easier than it could be.

The first step appears to be pretty straightforward. The Australian Taxation office must be notified within 28 days. This must be done in writing and include the name of the SMSF, its ABN, the name and contact details of a contact person for the fund and the date upon which the fund was wound up.

Dealing with members' benefits is not so simple. All parties involved need to be reminded that serious penalties apply for accessing superannuation benefits before the member meet's a condition of release.

Member's benefits need to be dealt with in accordance with both the trust deed and superannuation law. Our trust deed provides a very straightforward explanation of when and how an SMSF must be wound up.

For starters it states that a fund may only be wound up if it has no members or if all members agree in writing to its winding up, or when superannuation law requires the fund to be wound up.

The main reasons stated in superannuation law for the winding up of a fund include:

1. 1. All members and trustees have left the fund
2. 2. All benefits may have been paid out
3. 3. The fund may no longer meet the definition of an 'Australian Superannuation Fund' because the trustees have moved overseas permanently or
4. 4. Members may have decided that it is not in their best interests to use the SMSF structure as their retirement savings vehicle

It is the responsibility of the trustee, prior to winding up the fund, to dispose of all its assets (investments) in order to pay member benefits. The sale of assets may result in a capital gains tax liability, which must be paid before the trustee can set about distributing funds to members.

They also need to close the income account and reserve account and transfer the balance to members' accounts as prescribed in super law. There must be no assets remaining in the fund when it is wound up.

All expenses and taxes must also be paid as part of the winding up process. That includes fees and expenses owing to creditors and professionals such as accountants and auditors. The fund's last income tax and regulatory returns will need to be lodged. This includes ensuring the fund completes a final financial and compliance audit.

Auditors need to check a few extra things when a fund is being wound up and maintain their working papers and checklists accordingly. For complete list and if auditors want to complete an audit in half the time, click here. 

In some cases, benefits will be able to be dispersed directly to fund members. That is if they meet a condition of release. If that is not the case, a member's account balance will need to be rolled over into another complying superannuation fund. Like a public offer fund, AMP, MLC etc

In the event that the fund is being wound up because the last remaining member has passed away, the trustee must comply with the wishes of the member's binding death nomination (if there is one). Otherwise they can distribute the benefits as they believe equitable. If there are no surviving beneficiaries, the trustee will need to adhere to superannuation law in relation to unclaimed monies.

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