Have you got an exit plan? The importance of estate planning.
Australia is in the early throes of an unprecedented inter-generational wealth transfer, with Baby Boomers set to hand down in their Wills, an estimated $3.5 trillion over the next 20 years, according to McCrindle’s Wealth Transfer Report.
There’s no national data on the size of inheritances, but there are state figures that provide a glimpse.
In Victoria, for example, the Grattan Institute says around half of ‘final’ estates – where there’s no surviving spouse – are over $500,000. The average is $773,000. More than half this wealth is in the form of property with the remainder super and other assets.
With so much money at stake, planning is crucial. It’s important that your assets are distributed according to your wishes and your legacy doesn’t end up in a quagmire of family disputes.
Who’s getting what?
Despite the jokes and bumper stickers suggesting retirees are merrily spending their kids’ inheritance, most people want to leave an inheritance for their children and grandchildren.
According to Grattan again, three-quarters of final estates go to the ‘kids’, average age 55. The rest goes mostly to grandkids and other younger family members such as nieces and nephews. Barely 6% goes to non-family or charities.
Simple. What could possibly go wrong?
Plenty as it turns out, especially where the final resting place of super is concerned. Some well-known court cases show how easily the best laid plans can unravel.
Katz v Grossman (2005) NSWSC 934. Evelin and Erwin Katz were member/trustees of their SMSF. When Evelyn died, their daughter Linda Grossman was appointed trustee in her place, with Erwin the sole member of the fund. Erwin indicates in his Will that he wants his super divided equally between his two children, Linda and Daniel Katz but he makes no binding death benefit nomination to that effect. When Erwin dies, Linda appoints her husband as a trustee of the fund and they decide to pay the entire $1 million benefit to her. Daniel takes the matter to the NSW Supreme Court which determines that Linda’s actions were legal and rules in her favour.
Ioppolo & Hesford v Conti (2013) WASC 389. Francesca and Augusto Conti were both member/trustees of their SMSF but were estranged. When Francesca died, two of her four children (Rosario and Grace) are appointed executors of her Will. Her Will stipulated that all her super benefits were to be paid to her four children and that none was to be paid to her estranged husband. On her death, Augusto retired as trustee and appointed a corporate trustee with himself as sole director. The trustee then paid Francesca’s total $648,586 benefit to Augusto. Rosario and Grace take the matter to the WA Supreme Court, arguing they should have been made trustees on their mother’s behalf, but the court rules that Augusto was not obliged to appoint the executors as trustees and finds in his favour.
The lessons of history
The two court cases above highlight the importance of not just planning how you want your estate to be distributed when you die but following through with correct documentation.
Some of the key issues to be mindful of where your super is concerned are:
The importance of binding death benefit nominations
Erwin Katz’s mistake was leaving only one of his children with control over his super fund. Even so, if he had made a binding death benefit nomination his wishes would have been carried out regardless of who took control of his fund.
If you have a valid binding death benefit nomination in place when you die, the trustee of your fund (whether it’s a public offer fund or a SMSF) will be bound to pay your super benefit to the people you specify in the proportions you nominate.
To be valid, a binding death benefit nomination must be renewed every three years.
Super is not an estate asset
Your super death benefit is not covered by your Will. You can, however, make a binding death benefit nomination instructing your super trustee to pay your death benefit to your estate, where it will be distributed according to your Will.
If Francesca had made a binding death benefit nomination to divide her super benefits equally between her four children, her wishes would have been carried out.
Whether you have an SMSF or you are a member of an APRA-regulated fund, you need a valid Will and a valid binding death benefit nomination. Make sure they’re crafted in such a way that one doesn’t cancel the other out. And remember to update both whenever your circumstances or those of your children change.
Mistakes can be costly
In both cases above, Francesca and Erwin had told their family who they wanted to receive their super when they died and in what proportions. Like many parents, they wanted their estate split evenly between their adult children.
But a lack of correct documentation meant their wishes weren’t carried out. The legal disputes that followed were not only financially costly, presumably the emotional fallout was equally devastating.
Professional advice may be cost-effective
Estate planning and the interaction between Wills and super can be complex. Today’s families can be equally complex, with blended families and divorce increasingly common.
In many cases, timely professional financial and legal advice could save your family going through the uncertainty and emotional stress of a disputed estate.
SMSFs in a league of their own
If you have an SMSF, make sure the trust deed is up to date. Also ensure you have mechanisms in place to prevent your surviving partner or one of your children abusing control over your death benefits to deprive your chosen beneficiaries of their inheritance.
It’s also worthwhile remembering that SMSF objections can’t be taken to the Superannuation Complaints Tribunal but will end up in the courts.
Article by Barbara Drury for superguide.com.au