FROM SMSF TO BLOODLINE WEALTH PROTECTION: A GRANDFATHER’S FINAL WISH FOR HIS GRANDSON

Part 3 - Five Strategies for John and Liam

1.     The SMSF Strategist Five Strategic Options

Option 1: A Testamentary Trust (TT) – The Lawyer’s Advice

A testamentary trust is a trust created under John’s Will that would hold his SMSF proceeds for Liam. The lawyer’s argument:

• It provides control over how the funds are spent.

• It ensures asset protection against creditors or future family disputes.

• Liam, as a minor, benefits from adult tax rates on trust distributions.

Problems with the Testamentary Trust

1. SMSF Death Benefits Must First Go to John’s Estate

   • This means they can be contested by Ben and Sandra under Victoria’s family provision laws.

   • Ben and Sandra as children could argue for a “fair share” of the estate.

2. Probate and Delays

   • The final payouts could take months, even years if contested, delaying Liam’s access to funds and will cost in the hundreds of thousands of dollars in legal fees.

Clearly, the TT exposes John’s wealth to unnecessary risk and is the least attractive option.

Option 2: Withdrawing and setting up a Family Protection Trust now

The second option is for John, while he is in his final year of life to withdraw his super benefits from his SMSF and gift this to a Family Protection Trust (FPT) which has himself and then Liam as Family Protection Appointors. Unlike most discretionary trusts, a FPT does not have named beneficiaries due to the inherent trustee removal issues by beneficiaries - seen in Owies v JJE Nominees Pty Ltd [2022] VSCA 142.  On Johns death, Liam and his bloodline children will be beneficiaries of the trust and exclusions for spouses or step-children.  It extends to bloodline relatives as well,

The benefits in this strategy are:

·       The gift by John prior to his death ensures that the super benefits are tax free and we do not have to rely on seeking a PBR that Liam is a dependant.

·       As the gift happens prior to his death it is not caught up in any family provision claim.

The downsides are:

·       Any distribution by the FPT to Liam prior to age 18 will be assessed at the penalty tax rates for trust distributions to minors.

·       As Liam is under age 18 he cannot be a director of the corporate Trustee. So who will take that place until Liam becomes director of the corporate trustee.  Liam can be the Family Protection Appointor as a minor.

Option 3: SMSF Will to Death Benefits Trust

A SMSF Will is a set of strategic directions encapsulated in the governing rules of the Fund which go beyond standard Binding Death Benefit Nominations, that are essentially built for industry and retail superannuation funds.  Further section 102AG of the ITAA enables the creation of a death benefit trust on the death of John with the passing of his death benefits into the Death Benefit Trust.  The beneficiary will be Liam and his bloodline children.

The advantages are:

·       Liam is taxed at adult tax rates.

·       The DBT is protected from any family provision claim.

·       Any future litigation or family law action against Liam is protected.

However, the disadvantages are that:

·       Liam is subject to tax on distributions.

·       He is not able to be a trustee or corporate trustee director until age 18.

Option 4: A Strategic SMSF Will with an Account Based Pension.

The SMSF Will can provide that on John’s death his benefits are to be paid as a SMSF Pension to Liam.  Since Liam qualifies as a financial dependent, he can receive a pension from the SMSF and as he is not John’s child the commutation rule at age 25 does not apply.

The advantages are:

·       The pension is assessable income, but he receives a 15% tax offset and the underlying income and capital gains in the fund are tax exempt.

·       It is not caught up in any family provision claim.

·       It provides Liam with a constant income stream and may be tailored with limited commutations written into the SMSF Will and pension documents.

The disadvantages are:

·       It is not protected from litigation or any family law or defacto separation agreement.

·       The pension is tested against Liams pension transfer balance cap which limits future superannuation.

Option 5: Reversionary Pension – John then to Liam

In this case John can commence an account-based pension now and have Liam as a reversionary

pension beneficiary.  This is the same outcomes as Option 4 however, as the pension is from John, who was receiving it tax free, it will also be tax free to Liam.  All other advantages and disadvantages from Option 4 apply.

SMSF Strategy Wrap Up

There are another five strategies that can be brought to bear for John and Liam.  The most important thing to remember is - it is not about SMSFs – you have to look at SMSFs, estate planning and asset protection for Liam.  For the best advice contact grant@grantabbott.com