Don’t leave your family’s future to a loophole. Photo: DC_Studio.
If you’ve written your will, you could be forgiven for assuming your life savings are secure. But for the one million-plus Australians holding an estimated $1 trillion-plus in assets within self-managed super funds (SMSFs), there is a critical catch. “Most people don’t realise that your will does not control your SMSF,” MV Law Wills and Estates Partner Tanya Herbertson says.
“When writing a will, a person is making arrangements for their ‘estate’ — the assets and liabilities that they have at the time they pass away. Superannuation is usually not included in this estate.”
Up to a point, the rules governing superannuation are the same across the board. Whether you are with a regular (retail or industry) fund or running an SMSF, directing where your money goes after you pass away requires a binding death benefit nomination.
By law, this “death benefit” must be paid to a dependent, such as a spouse, child or someone in an interdependency relationship, or directly to a legal personal representative to be distributed via your will. Each pathway carries vastly different tax implications, but the upshot is the same.
“If you don’t lock things down with a binding nomination, whoever holds control of your SMSF after your death will hold the purse strings,” Tanya says. “You don’t want your life savings landing with the wrong person.”
From there, the process for establishing legal control over an SMSF’s assets diverges sharply from regular funds. It all starts with how the rules are written.
While public funds operate under standardised industry regulations, every SMSF is governed by its own unique trust deed. This single document dictates everything from what makes a nomination legally valid to how internal disputes are resolved.
“You have to follow precisely what the deed says to put in place a valid binding death benefit nomination,” Tanya says.
“We say to all of our clients that it’s a good idea to get confirmation in writing from the trustees that they have received and accept the nomination, so it’s clear everyone is on the same page.”
MV Law’s Tanya Herbertson says most people don’t realise their will does not control their SMSF. Photo: Michelle Kroll.
Getting that confirmation is vital because, unlike retail or industry funds, SMSFs operate without an independent corporate board to act as a neutral referee. If you die without valid instructions, an SMSF hands total discretionary power directly to the surviving trustees (usually a surviving spouse, a business partner or a corporate entity).
Without a binding nomination in place, this sudden power shift can trigger disputes.
“A classic example is the case of Katz v Grossman. In that case, the deceased father intended for his superannuation death benefits to be split equally between his two adult children. However, his daughter had been appointed as a co-trustee of the fund before his death,” Tanya says.
“Because the father only left a non-binding nomination directing a 50/50 split, the daughter legally took sole control of the fund upon his passing. Exercising that control, she refused to follow her father’s non-binding wishes and paid the entire life savings to herself, completely cutting her brother out.”
Even if you have already put a binding nomination in place, it is rarely a set-and-forget exercise.
“While most modern deeds will allow for non-lapsing nominations, some older self-managed superfunds will require renewal every three years,” Tanya says. “Lapsing nominations can be dangerous, especially if you lose capacity and can’t make another one.”
Between strict legislative requirements and the idiosyncrasies of individual trust deeds, nominations can easily be invalidated by minor technicalities.
Fortunately, avoiding these traps is straightforward.
“We strongly recommend every SMSF member consult their solicitor, accountant or financial planner, and review their plans regularly,” Tanya says.
For more information, visit MV Law.
