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Assets held in superannuation

I mentioned above that your superannuation benefits may not necessarily form part of your estate (to pass under your Will).

This is because it is held in a superannuation fund. You are not the legal owner of your superannuation, although you may be entitled to it upon certain conditions being met.

Death is one such condition, which means your estate may be able to receive the superannuation. The transfer, however, is not automatic.

There are many ways you can get your superannuation paid, but firstly, you need to appreciate the following.

Only certain people can receive your superannuation directly. That means they receive your superannuation from the superannuation fund and not through your estate.

Those people are your spouse (including a de facto or same sex spouse), child and any person who had an interdependency relationship with you (they were dependent on you).

If none of the above people are around, then the only other person able to receive your superannuation benefit is your personal legal representative (your executor).

The tax on the superannuation payout will also change depending on who benefits, and I suggest you talk to a professional advisor if you want to know the specifics.

How your superannuation payment can be distributed will also change depending on who benefits. That is, some people can receive it in a lump sum whilst others can have it paid as an income stream. Again, talk to a professional advisor if you want to know the specifics.

Anyways, let's consider how your superannuation can be paid out.

There are two general ways your superannuation can be paid out when you pass away.

Firstly, you can have your superannuation benefits paid automatically to the intended beneficiaries (provided they are eligible recipients). Alternatively, you can leave the discretion with the trustee of your superannuation fund.

There are various forms and documents that can be prepared to deal with your superannuation in either way above, but they can be narrowed down to either a binding death benefit nomination (commonly known as a BDBN) or a non-binding death benefit nomination.

As the name suggests, one is binding and will be automatic once you pass away (provided it has been drafted properly), and the other leaves the discretion for your trustee to pay out in a better manner.

If you have proper advice, sometimes the binding death benefit nomination is better as there is certainty your superannuation will be paid in a manner that you wish.

You may also hear the term ‘reversionary pension’. This is only really relevant for those people who has a pension being paid out at the time of passing away. A reversionary pension means there’s an automatic defaulting on who benefits. Again, you should talk to a professional about the specifics.

If you didn’t know already, superannuation is highly regulated, and there are special people around who are authorised to provide financial advice to you in relation to your superannuation.

Seek out those people! Don’t go getting advice from a random person who can’t show you their license (especially an online program!).

What I talked about above relates to superannuation for everyone.

However, I understand that you have a self-managed superannuation fund (which is a superannuation fund that you can make decisions on how your super is invested), let's call it SMSF in short.

The second most important aspect of your self-managed superannuation fund in relation to your estate plan (other than ensuring your superannuation passes as you intend), is ensuring control in this entity passes in a consistent manner as your superannuation benefits.

At the minimum you should get either the payment of superannuation or control of the superannuation fund right.

At the best, you get both right.

There are plenty of cases of people fighting over superannuation in a SMSF.

Would you like an example?

Here’s the story of Katz v Grossman:

• Dad had a SMSF
• Under superannuation law, you need at least two individuals to act as the trustee for the SMSF (the legal owner)
• Dad was a trustee with his daughter (Linda)
• When Dad died, Linda appointed her husband to ensure the superannuation law was not breached
• Dad left a non-binding death benefit nomination to pass his superannuation between Linda and his son (Daniel)
• Linda and her husband did not follow the non-binding death benefit nomination and paid everything to Linda
• Daniel was unsuccessful in challenging this.
• Dad got both the payment of superannuation and control of the superannuation wrong.

Here’s the story of Wooster v Morris

• Dad left two adult daughters from his first marriage and his second wife (Morris).
• Dad and Morris were the trustees of the SMSF
• Dad made a binding death benefit nomination in favour of his two daughters
• Dad died with about $925,000 worth of superannuation benefits.
• Morris took steps to stay in control of the SMSF and then pay herself the superannuation benefits.
• It was found that Morris had to follow the binding death benefit nomination in favour of Dad’s daughters.
• Here, Dad got the payment of superannuation right, but the control wrong, and although there was a happy ending, it came after incurring unnecessary legal fees.

Did you want one more example?

• Dad passed away leaving step-mum as trustee with another person, for the superannuation fund.
• It was Dad’s intention that his two daughters benefit from the superannuation, by having the superannuation pass into his estate
• As it turned out, his binding death benefit nomination was not properly prepared and as a result, step-mum could make the decision not to pay the superannuation into Dad’s estate
• Dad’s two daughters were left without having the superannuation paid into the estate which was held to be correct
• This is the story of Dad getting the payment of superannuation wrong, and even failing to have control of the superannuation pass properly.

So that’s superannuation. I’ve only scratched the surface. When a lawyer assists, they are normally tasked with ensuring your SMSF document contains sufficient power to effect what is required.

The director’s role in a company is to pretty much make the decisions for the company. This will involve them signing documents where necessary as they decide what contracts the company enters into. Do note that other people can make decisions for the company (such as an attorney or agent), but they need to be appointed by the directors.

The shareholders of the company are the people who reap the rewards of the retained profits of the company. That is, after the company makes a profit and pays tax, if such money is to be paid out, they would be paid to the shareholders (I know there are other ways to pay money out such as fees and wages, but let’s keep it simple). The shareholders also have the ability to dictate who the directors are (subject to the terms of the company’s governing document).

Here’s a quick summary what you need to know from an estate planning perspective.

In terms of estate planning then, the key role to consider is not the director, but rather the shareholder. This is because the shareholder can decide at the end of the day who the director is.

Also, a shareholder of a company has an asset that can pass under the shareholder's Will (if the shareholder is an individual). It is the shares in the company.

The question therefore is whether you own shares in a company, or if they are held by some other person or in some other entity (such as a trust).

If you own shares in your own name, you can gift those shares to particular people under your Will, and the recipient will be able to take steps to take control of the company.

If shares are held in other entities such as a trust, or even a partnership, you will have to consider how estate plan is related to those entities (which you can find out at the end of this chat).

If you do happen to own the shares in a company, then you need to query if multiple people should receive the shares and if so, in what proportions. Further if you have only 1 share in a company, but wish to gift the share to multiple people, you may need to take steps to split the shares into a divisible number. Otherwise, your executors will have to take that step.

You should also consider if the multiple people receive shares can work together. If you gift shares to various people and they fail to work together, there could be a dispute at a later time.

In certain situations, professionals may suggest whether steps are able to be taken to restructure assets to be held in separate companies so you are able to give the shares in the respective company to the relevant beneficiary (without having them own shares in the same company).

This means that they won’t have to work together!

Look, as with everything, if you hear the words ‘restructure’, you should be asking your advisor to provide written advice so if something goes wrong (let’s say you get hit by an unexpected tax bill), you can ask your advisor what happened.

Whether it is worth a restructure, is a matter of balancing the costs and advantages (certainty for your estate plan against the costs incurred to undertake the restructure).

Some other things about companies. Some people might want to lay down some rules if they were to pass away. Such rules could dictate who can be a shareholder or director of the company.

This is commonly seen where a company conducts a business, and the controller of the business wants to ensure appropriate people are appointed as a director upon their passing. I mention this because it is worth having your lawyer review the constitution of any company to ensure there aren’t clauses lying around to surprise you, or restrict who could benefit through the shares under your Will!

Do you want an example on the various ways to pass control in a company properly (provided an individual owns the shares)?

The simple one:

• Mum held 1 share in a company.
• She is the only shareholder of the company.
• The company holds term deposits (or investment shares).
• She would like her three daughters to benefit equally.
• Mum took steps to split her 1 share into 3 shares, and then made a gift under her will of 1 share in the company to each daughter.
• When she passes away and if the daughters all agree, the term deposits held by the company can be cashed and distributed to the daughters through their shares in the company.
• Now if mum anticipated her daughters fighting (due to differences in investment knowledge and personality), she could take steps before her death to transfer the term deposits into separate companies and pass the shares in each of her companies to the relevant daughter.
• In this case, the term deposits/shares were in the sum of a few million dollars, and could not be transferred out of a company environment, so she required legal advice to ensure no adverse taxation issues relating to the investment shares.

The business example:

• Dad operated a business through a company.
• He has two children, A and B.
• A is involved in the business and B wants nothing to do with it.
• Dad has to make sure the shares pass to A under his Will.
• Let’s assume Dad wants A to take the running of the business but have B still benefit a bit.
• Dad could gift 80% of the shares to A, and 20% of the shares to B under his Will.
• Dad is also a bit concerned that A won’t have the expertise to manage the business when Dad is not around, so he would like to ensure at least two independent directors are appointed to assist with the ongoing operation of the business.
• The company’s governing document was then amended to ensure that upon Dad’s death, there were always at least two independent directors appointed with A.

Just before moving on. Be aware of loans to and from the company. If the company owes money to other people, that loan stays even when you pass away. On the other hand if you owe money to the company, again, be careful as this may impact the people benefiting under your Will (who doesn’t receive shares in the company). I won’t try to bring in tax lingo – but the term Division 7A loans cause grief to advisors all the time, and it arises normally with loans made by a company to related people or trusts (or a gift or some form of financial benefit from the company to related people or trusts of the company.

The take-away is to ensure you pass all of the control roles in a trust properly. Chat to a lawyer to review your trust document and confirm how this can be done.

All this talk about passing control relates to the fact that you want the person to benefit from the asset of the trust, to be the person in control.

There are situations when you might not want them to align.

For example, you might want someone to benefit, but you don’t trust them to manage the assets (someone not investment savvy). In these situation you would want to appoint other people to ‘control’ the trust for the benefit of your intended beneficiary. That said, you must trust that those people will do the right thing.

There are ways to ensure you can rule beyond the grave, but they are often complicated, costly and inflexible.

Another issue to consider is if you want multiple people to take control and benefit from the trust.

In these situations the big question on whether they will get along is highlighted. Person A might want to invest in this manner, and Person B would rather invest in a different manner. Personalities clash, and then the trust moves to a halt.

There are strategies that can be implemented to ensure each person takes control of their own share, but that would require restructuring if multiple assets are owned in one trust. Whilst a solution can be found, it is just a matter of whether the costs associated with restructuring are weighed by the benefit of having peace of mind that your assets will go to the right people, without fight.

You may hear words such as ‘trust splitting’, ‘trust cloning’ and ‘umbrella trusts’. These are often associated with estate planning strategies for trusts and ensuring multiple recipients receive their own share of the trust’s asset to operate with. All must be only considered with specialist advice, as although they can each offer their own solution, they each have their own drawbacks.

I’ve highlighted some of the issues to ponder about with assets held in trusts. This can get more complicated with more trusts, or alternatively simpler as you just pass control in each trust to the intended person (rather than dividing one trust between many).

Here are some common issues to consider with your trust document (appreciating that all trust documents can be different):

1. Your trust document states who succeeds you and there is no power to change that nomination.
2. Your trust document does not allow relevant people to nominate a successor in your Will.
3. Your trust document has restrictions on who can be a successor.
4. Your trust document does not have sufficient power to let you change the terms of the document to do what you want.
5. Your trust document does not have broad enough powers to let you nominate the people you want (i.e. multiple people in a variety of manner, such as successively or by majority if more than 2).

Trusts are complicated entities (like all entities), and in terms of estate planning, it is always recommended you have a legal specialist to review the trust document to ensure things pass as intended so you can have some peace of mind.

Do note the trusts I have been talking about are considered your standard ‘family’ or ‘discretionary’. There are various other types of trusts out there (40 + and counting), so please don’t assume anything, and get things checked.

Just to round off a bit about trusts, did you want an example of what issues can commonly come up with estate planning and trusts?

Here you go.

To have an express nomination or leave it as is

• A common clause in some trust documents are that once a controller (or the last controller) passes away, that controller’s legal personal representative is appointed as the successor controller.
• Whilst such a clause is useful if your executor (remember your executor is your legal personal representative) is the intended person you want to take control of that trust, it may be troublesome if you update your Will and forget to consider your trust.
• In that situation, you may update your executor of your Will and inadvertently give that person control of the trust you intended someone else to control.
• As such, express nominations do offer certainty as a change of your Will would raise your successor nomination to the Will drafter’s attention.
• Alternatively, having a nomination made in a separate document means that even if your Will is updated later on, the nomination stands. In contrast, the issue may be you forget about this separate nomination as it is not either in your Will or in the trust document.

Multiple people, multiple assets, one trust

• Mum and dad left a share portfolio in the family trust.
• A and B were appointed as successive controllers of the trust.
• Unfortunately, A is a professional financial advisor who is well-versed with the stock market. In contrast, B lives the hippie life and is sceptical with all things blue chip.
• A and B want to go their separate ways with the share portfolio, but they are joined by the hip by having the entire portfolio in the same trust. If one of them leaves with their share, there will be a big tax bill!
• Strategies such as trust splitting and trust cloning are considered.
• Each with their own advantages and disadvantages, a restructure was made so that A could manage 50% of the share portfolio on his own and B could manage the balance 50% of her own. They also took additional steps to ensure the successor of their respective shares stayed within their friends and family.

Multiple people, multiple properties, one trust

• Mum and dad left two properties in the family trust.
• A and B were appointed as successive controllers of the trust.
• Unfortunately, A and B do not get along and wish to take one property each and leave.
• However, if one of them leaves with their property, there will be a big tax bill!
• Strategies pre-death such as trust splitting or trust cloning may have assisted with avoiding this issue.
• Each strategy has their own advantages and disadvantages in getting one property into a structure for each of A and B.
• The end position is that A will take control of one property and B will take control of the other property without having to be involved with each other.

Before we keep going, please note that certain types of trusts may have multiple governing documents (imagine documents such as unitholders agreement or property agreements).

Please also consider that when you have trusts, there may also be amounts owed by the trust to other people (maybe the trust owes money to them, or there is something called an unpaid present entitlement owed). You need to be careful that if you pass control in a trust to A, and the trust owes money to B, then A will be required to repay B out of the trust if B calls on the money. The tip is to ask your lawyer about loans and unpaid present entitlements.

Okay, let’s keep moving.

A shareholders agreement (or unitholders agreement or partnership agreement depending on the business structure) is a document that governs how decisions are to be made between the business partners. Although not strictly in relation to estate planning as it can include clauses relating to restraint/non-compete provisions on a business partner existing as well as who can be appointed to make decisions, some agreements do consider what happens when a business partner passes away.

In other situations, a buy sell deed or put call deed (I’ll call it a buy sell deed) is quite focussed on ensuring that each business partner (or their representatives) receive their market value for their share in the business upon certain events happening to them. For example if you were to pass away, the buy sell deed can provide clarity that your estate or related entity receives market value for your interest in the business. Your interest would be bought by the continuing business partner who can proceed knowing there will be no disruption as you have been bought out.

It also gives your estate or related entity certainty that your business partner won’t move clients and the business to another entity, and leave your interest as being worth nothing as everything has moved on.

If there’s one thing you need to appreciate, it is that you and your business partner need to be on the same page with this, otherwise no agreement will be struck!

Final comments

Look, we have only covered the general concepts of estate planning.

It can be tricky for those with complex affairs.

For those with simple affairs, it is still important to get appropriate documents in place.

At the end of the day, it is intended to reduce the red tape when you pass away, for the benefit of your intended beneficiaries.

I know we have covered a lot already, but there’s one final concept I want to touch on.

That is; having power of attorney documents in place. Whilst a Will and your estate planning documents will largely consider what happens if you pass away, power of attorney documents relates to when you need someone to make decisions on your behalf.

Would you like me to explain a bit more about what a power of attorney document is?

Okay, but please do consider it. You’ll also need to consider whether you should have power of attorney documents for any related entities (where relevant).

Power of attorney documents allow you to nominate someone to make decisions on your behalf while you are still alive.

These decisions can be broken up into financial decisions and personal/health decisions. That is, you can appoint a financial attorney, or a personal/health attorney (also called a guardian in some States).

Generally, financial attorneys are able to make any financial decision you can make. This is necessary if you are unable to make decisions yourself, and someone is required to make those decisions (paying the bills, or transferring money from one bank account to another) on your behalf.

Lawyers’ preferences differ on this point. Some recommend that a financial attorney is only able to act on your behalf once you lose capacity (so your attorney cannot abuse their power). Other lawyers recommend to have this power effective immediately (having someone able to make decisions on your behalf when you can’t, for example, while you are overseas, on a cruise or ill in hospital).

Lawyers’ preferences also differ on whether you should include clauses to broaden the financial powers. Whilst there are some limitations on what your financial attorney can do (such as a limitation for your attorney to enter into conflict transactions), these limitations can be overridden in certain States. If your power of attorney document has a specific power, then your attorney can into transactions that they may not be able to enter into without specific mention. Talk to your lawyer about this and see what they recommend.

The other type of power of attorney relates to personal/health matters.

In contrast to a power of attorney for financial decisions, personal/health matters are only effective once you lose capacity

They also generally relate to minor health decisions, but the matters they cover will differ from State to State.

There are also some other health documents called advance health directives that you should consider walking through with a doctor so that there is clarity on what should happen to you if you were to be in a critical health condition.

Do note that the rules relating to powers of attorney will change from State to State so do discuss this with your lawyer, or even just google the Government’s website first for some information. We’ll provide a link about power of attorney documents below. Do consider looking up ‘advanced health directive’ or discussing it with your doctor.

Here's a link to enduring power of attorney documents based on the State you have told me where you live in:

Here is the link for Queensland: www.qld.gov.au/law/legal-mediation-and-justice-of-the-peace/power-of-attorney-and-making-decisions-for-others/power-of-attorney

Here is the link for New South Wales: http://www.tag.nsw.gov.au/what-is-a-power-of-attorney.html

Here is the link for Victoria: http://www.publicadvocate.vic.gov.au/power-of-attorney

Here is the link for South Australia: https://www.sa.gov.au/topics/family-and-community/planning-ahead/power-of-attorney-and-advance-directives

Here is the link for Western Australia: http://www.publicadvocate.wa.gov.au/E/enduring_power_of_attorney.aspx

Here is the link for Northern Territory: https://nt.gov.au/law/processes/power-of-attorney

Here is the link for Australian Capital Territory: https://www.ptg.act.gov.au/powers-of-attorney

Here is the link for Tasmania: http://www.publictrustee.tas.gov.au/enduring-power-of-attorney.html

Shout-outs

So this ends all the education I can give you. I hope it has been relevant.

Feel free to provide any feedback (‘Eep back’) here including whether you found me useful, what you felt could be improved, and if there is anything more that should be included. Give me feedback and receive a free 15 minute call back in relation to any questions you may have in relation to estate planning (subject to lawyer availability).

Thank you for taking the time to read me. I will continuously be updated for more content and stories, so feel free to come back at a later date.

If you found me useful, please share me with your friends and families so that I can help guide them through what may be relevant for their estate plan.

Remember, everything I have said is free knowledge that you should know so that you can make an informed decision.

However, it is not legal advice, and you should discuss your own estate plan with an estate planning specialist.

Anyways, was there anything else I could assist you with today?