Self Managed Superannuation funding for Business Wills

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I recently read an article which highlighted the potential benefits for clients using their Self Managed Superannuation Fund (SMSF) to fund their buy/sell agreement (also commonly referred to as a Business Will).

The concept is simple. Instead of each business owner effecting an insurance policy on their own life, for a Business Will the policies are owned by the trustees of the superannuation fund.

However whilst the concept is simple, there are a number of pros and cons of SMSF-owned insurance funding (which need to be considered on case by case basis) before proceeding down this path.

This article highlights the advantages and disadvantages as listed below:

Advantages

  • A tax deduction for the super contribution;
  • Tax-free benefits flowing in lump sum or pension form to death benefit dependants;
  • The SMSF obtains a tax deduction for the payment of death and disability insurance premiums;
  • Personal cash-flow benefits;
  • ATO verification that the super buy/sell agreement complies with the sole purpose test;
  • SMSF tax-planning opportunities through anti-detriment and future payment provisions;
  • The ability to utilise binding nominations in favour of the estate or dependants.

Disadvantages

  • Should the trustee favour non-death benefit dependants, tax is payable;
  • A superannuation income stream benefit generally cannot be paid on death to adult children;
  • The insurance levels not keeping pace with the value of the business could make the agreement ineffective, unless alternative arrangements are in place;
  • Non-death triggers (eg, TPD or Trauma) may not be suitable for superannuation ownership due to potential access restrictions and tax on benefits.”

Issues for Self Managed Superannuation & Business Wills

From a legal perspective, the main issue I see is the need for regular review of the Business Will. This requires an ongoing commitment from each business owner to regularly review the Business Will and update it, if required.

There is also the fact that the value of the business could change over time and create a shortfall in the insurance levels. This would require careful consideration by the business owners on what is to happen and how and when any shortfall is to be paid.

It is important that the SMSF deed is thoroughly reviewed and appropriate measures are in place to cover non-death trigger events such as trauma and TPD.
These issues need to be carefully considered and compared with the obvious tax advantages. It is also critical for all clients to obtain the professional advice of a qualified accountant before implementing any insurance policies owned by their SMSF.

If you are considering structuring your Business Will through your Self Managed Superannuation Fund, it is important to obtain the correct legal advice.

Please do not hesitate to contact me if you would like to discuss this further.

The information provided in this article is for general information and educative purposes in summary form on legal topics which is current at the time it is published. The content does not constitute legal advice or recommendations and should not be relied upon as such. Whilst every care has been taken in the preparation of this article, FC Lawyers cannot accept responsibility for any errors, including those caused by negligence, in the material. We make no representations, statements or warranties about the accuracy or completeness of the information and you should not rely on it. You are advised to make your own independent inquiries regarding the accuracy of any information provided on this website. FC Lawyers does not guarantee, and accepts no legal responsibility whatsoever arising from or in connection to the accuracy, reliability, currency, correctness or completeness of any material contained in this article. Links to third party websites or articles does not constitute any endorsement or approval of those sites or the owners of those sites. Nothing in this article should be construed as granting any licence or right for you to use that content. You should consult the third party’s terms and conditions of use in relation to any third-party content. FC Lawyers disclaims all responsibility and all liability (including liability for negligence) for all expenses, losses, damages and costs you might incur as a result of the information being inaccurate or incomplete in any way. Appropriate legal advice should always be obtained in actual situations.

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