Managing Lumpy Assets in a SMSF for Effective Estate Planning

Relevant For:

SMSFs with real estate investments.

Key Points:

  • Superannuation, often a significant asset, can include “lumpy” assets like real estate in SMSFs.
  • Death of a member necessitates compulsory payment of benefits from the SMSF, typically within six months.
  • Lumpy assets can complicate estate planning; proper strategies can mitigate issues.
  • Solutions include pension nominations between spouses, cash contributions by surviving members, or in-specie transfers.
  • Effective planning maximises SMSF property value and maintains tax benefits.

Full Article:

Self-managed superannuation funds may own “lumpy” assets, such as real estate.

Businesses often purchase their premises through an SMSF using limited recourse borrowing arrangements or increased contribution caps.

The impact of lumpy assets on estate plans is often overlooked.

Superannuation and Death: The Role of Binding Death Nominations

Superannuation does not automatically form part of one’s estate upon death. It is controlled by a trust deed, and members must complete a death benefit nomination to direct the trustee on how to distribute the superannuation. Without this, the trustee has full discretion, which can lead to unintended distributions. Therefore, an effective estate plan includes a binding death benefit nomination.

Payment of Death Benefits and Lumpy Assets

The death of a member triggers a compulsory payment from the SMSF to dependants or legal personal representatives, usually within six months. Delays are possible if justified, but lack of liquidity may not be a sufficient reason. Depending on the trust deed, death benefits can be paid as a pension, lump sum, or through an in-specie transfer, though stamp duty may apply.

Planning for Lumpy Assets in Estate Planning

A key concern is how to pay death benefits if a lumpy asset like real property is involved and there isn’t enough cash. Solutions include:

  • Spouses can nominate each other to receive the benefit as a pension, avoiding immediate property sale.
  • Surviving members can make a cash contribution to the SMSF, subject to contribution caps.
  • In-specie transfer of the property, considering tax implications.

Proper planning ensures that lumpy assets are managed effectively during and after a member’s life, maximising the value and maintaining the tax effectiveness of the SMSF structure.