Protecting the SMSF nest egg with a “Superannuation Agreement” The overwhelming purpose of Superannuation is to build up a lump sum nest egg in order to create an income in retirement. Typically, the focus of clients with an SMSF is to select those assets, usually property that can be retained or sold for these purposes. For clients running a business, SMSFs provide a valuable asset protection structure, since assets held in a Super Fund, are with a few exceptions, protected from creditors and in the event of bankruptcy or insolvency. ABS statics indicate that in 2014 there was over $20 billion in wealth lost from divorce in Australia and this excludes domestic relationship and same sex relationship breakdowns. Given that there is over $2 trillion in superannuation assets of which SMSFs represent almost $600 billion, the risk of wealth lost to SMSFs from relationship breakdown is significant, particularly when about 50% of relationships end in separation. It is relatively unknown that from a separation point of view, the assets of the SMSF can be protected by a Superannuation Agreement made under Section 9OMH of the Family Law Act 1975. A Superannuation Agreement is a formal written agreement entered into between the parties to a marriage or a defacto relationship. The agreement can be a standalone agreement or can represent dedicated clauses in a Binding Financial Agreement dealing with other matrimonial assets. It can be made prior to a relationship, during or when it ends. By itself the Superannuation Agreement will only deal with how the assets of the SMSF should be divided or used on separation. In this format it won’t affect how the remaining matrimonial assets will be divided, which, for many couples, will be more agreeable. Use of a Superannuation Agreement A Superannuation Agreement is useful in the following circumstances: A second relationship where there are key assets to be protected for children of an earlier relationship;  A relationship where key inherited assets have found their way into the SMSF that are to be protected; A second relationship where children of a member are occupying or using property of the SMSF that needs to be protected for those children; Both members of the SMSF are aged, have limited resources and don’t want to sell or divide the SMSF assets in order to protect their retirement income. One of the member couples has failing health and likely to move into aged care. The couple wans to avoid the risks of the “separation” being used to divide the SMSF assets when they are needed for aged care funding, as was attempted in the case of Stanford. In each of the above scenarios, a Superannuation Agreement can provide certainty by creating restrictions and “pre-allocating” specific assets to a member or create rules on how they are to be used or sold. The agreement could even be creative. It could retain and segregate key assets and restrict their use and allocation of income from those assets for a period of time or even until the death of the member. This is particularly beneficial for a couple who recognise that that they will both be worse by dividing SMSF assets and want to formally retain them but preserve them for the estate of one or both members. If you want to explore the use of a Superannuation Agreement, please contact our office. Reversionary Pensions and Death Benefit Nominations – a potential death trap for clients !   At the present moment there is a great deal of uncertainty as to whether the terms of a pension income stream that is being paid to a member and expressed to be “reversionary” override what is stated in a Death Benefit Nomination or Binding Death Benefit Nomination for that matter. Typically, pension income streams that are set up where there is a husband and wife or couple members of the Fund will usually, for better tax efficiency, stipulate that on the death of the member, the pension reverts automatically to the surviving spouse. At Hill Legal we review pension documents and particularly death benefit nominations and more frequently we are coming across Pension Agreements which provide for a reversionary pension to the spouse on the death of the member but a death benefit nomination which says that on the death of the member, all of the members benefits are to be paid to their estate. In many cases the Will directs all of the super (along with all other assets of the estate) to the spouse but in the case of blended families the Will may distribute a portion of the estate to children from an earlier relationship and another portion, usually the most significant, to the surviving spouse. In these circumstances, does the spouse receive the entirety of the super account in the form of a pension because it is reversionary and therefore all of the super benefits or only a portion? Alternatively, if it is intended that the spouse is to receive all of the super from the estate, does the Super Fund have to close and transfer the superannuation death benefits to the estate, losing important tax concessions, because the death benefit nomination prevails over the reversionary pension? Which is Binding? Many superannuation commentators simply respond to this question by stating that “a reversionary pension takes precedence over a binding death benefit nomination” meaning that there is effectively no death benefit payable when the original pension member dies. However, despite this view, which is prevalent within the industry, there is no legal authority for this proposition either in the SIS Act, the SIS Act Regulations or the Income Tax Assessment Act 1997. Further, most superannuation deeds on the market are silent on this issue. It is the writer’s view that if such an issue comes before the court, in the absence of anything stated within the provisions of the Pension Agreement, the death benefit nomination or the rules of the fund which gives priority, it is open for a court to take the view that … Continue reading The Super Brief Newsletter – Issue – January / February 2016