The trust deed of an SMSF can play a significant role in influencing the outcome of estate planning disputes should they develop or help clients avoid disputes altogether.

This is because the trust deed can set out clear provisions relating to the payment of a member’s SMSF death benefits, particularly in the context of the intended hierarchy of death benefit payments.

However, with so many different SMSF deeds in the market, whether it be by age or origin, how one SMSF deed deals with a member's estate planning can greatly differ from another.

For this reason, it is crucial when addressing a member's SMSF estate planning that the deed in place is up to date and has clear and practical estate planning provisions to facilitate the desired outcomes of the member.

Key estate planning provisions when selecting an SMSF deed

As a starting point when examining a deed’s estate planning provisions, the deed should set out a clear hierarchy of how death benefits are to be paid on the death of a member.

This can greatly assist in mitigating disputes on the death of a member where there are multiple death benefit instructions in place – for example, a binding death benefit nomination (BDBN) and a reversionary pension.

The deed should also contain definitive powers for a member commencing a pension to appoint a reversionary beneficiary to receive the pension on the death of the member.

In addition to this power, there should be a mechanism for the member to amend, revoke or add a reversionary during the pension. This is important if a member’s circumstances change so they can alter the nomination reversionary beneficiary without having to stop and restart the pension.

When it comes to BDBNs, key provisions include the nomination to be non-lapsing by default. The deed should also cater for substitute beneficiaries on the death of a primary beneficiary.

Whilst these provisions seem quite obvious, we still see a number of deeds that don’t specifically provide that a nomination does not lapse merely by the passage of time.

Inbuilt flexibility is important

When it comes to the specifics of a deed’s estate planning provisions, flexibility is a good thing.

To mitigate future disputes, a good deed will keep procedural requirements relating to a BDBN to a minimum as these can cause issues if there is a dispute and the procedures have not been followed as specified in the deed.

Similarly, the format of the BDBN should be flexible rather than in a prescribed format to avoid it being challenged because the format is not exactly as specified in the deed.

From a practical perspective, provisions should also provide members with flexibility on how they can direct their payments upon their death to ensure payments are made in the most tax-effective manner, where possible avoiding family provision claims.

It is also important for members to have the ability to amend or revoke their BDBNs as their circumstances change. This is particularly pertinent in circumstances where a member dies while family law proceedings have commenced but have not been finalised. In this situation, having a default provision to automatically revoke a BDBN where a spouse is a nominated beneficiary will also serve to protect the estate planning interests of the members.

Deeds help maximise the effectiveness of SMSFs

It is clear from above that not every deed is created equal, and choosing the right deed partner, and regularly updating your SMSF deeds is important. Not only will this serve to maximise the effectiveness of the SMSF, but also ensure your clients have access to the most up-to-date practical and strategic estate planning and tax-effective options.

It is important to remember that not only do deeds vary greatly in the SMSF space, but how a deed is updated can have significant implications for your clients.

For this reason, when you update your SMSF deeds, it is important to ensure the deed of variation specifically retains all existing death benefit instruments that are in place. This will ensure these instruments are not inadvertently revoked when the new deed is adopted.

Another important consideration when updating deeds is to ensure that the deed of variation retains existing pensions that are in place for members. This ensures these pensions will continue to be paid on the same terms and conditions once the new deed is adopted.

SMSF deeds are a complex space and ensuring that your deed caters for the most up-to-date legislative and regulatory provisions, as well as up-to-date strategies including those relating to estate planning, can be difficult.

As the saying goes, the devil is in the detail.