Estate Planning: Family Trust or SMSF

What is Estate Planning?

Estate planning means setting up your financial affairs to ensure that your assets are distributed to your intended beneficiaries after your death. A good estate plan should consider how to lessen the tax due when your beneficiaries receive your assets.

Preparing a binding death nomination (SMSF will) is important because it contains instructions on what happens to your superannuation upon your death. Without a will in place, you can pass away ‘interstate’, the term used when you pass away without a will. Did you know that the government has a pre-determined table of who gets your estate if a valid will is not in place! 

Comparing the benefits of an SMSF over a family trust

Please click here to learn about the five benefits of an SMSF compared to other super funds.

SMSFs and trusts almost always have the same benefits they give to their members or beneficiaries, however superannuation is still the lowest taxed entity in Australia.  

Below is a comparison of the benefits given in an SMSF as compared to those of a Family Trust: 

1. – Tax Reduction 
   An SMSF is taxed at a fixed rate of 15% on the investment income during the accumulation phase. When the member is at retirement age, they can enjoy tax-free investment property income and lump-sum withdrawals. 
   Meanwhile, a family trust’s income is not taxed as the beneficiaries bear the tax due; therefore, the tax rate for the distributed income in a family trust depends on each beneficiary’s marginal rate. 
2. – Investment Control and Flexibility 
   Both SMSFs and Family trusts give their members and trustees control over their investments. In simple terms, they can choose where they invest their funds. 
3. – Estate Planning / Transferring Wealth to the Next Generation 
   A family trust does not cease on the death of a controlling individual; however, they need to modify their estate plan. It is also important to note that since the assets of the trust are owned by the trustee, they have discretion over who benefits from those assets. Preparing a will does not have any binding effect on the trustee’s decisions. 
   In an SMSF, they will follow the binding death benefit nomination to ensure that the wishes of the members are adhered to. 
4. – Transparency 
   All transaction records of both a trust and an SMSF are available to their members and beneficiaries. In this way, they are up-to-date with information regarding their values and the costs needed to maintain both entities. 

As you can see, both an SMSF and a Family Trust are good investment holding vehicles. However, the decision about which one is best suited for you will depend on your financial goals. You can opt to choose one or both. 

Since you can only access your SMSF upon retirement or upon meeting a condition of release, a family trust may be a better choice in the early stages of wealth accumulation. With a good investment strategy, you can effectively use the distributed income to add to your super. On the other hand, when there is a binding death nomination, the income from super can be excluded from an estate. This allows you to decide who you give your death benefits to. 

Many individuals find it effective to have both an SMSF and a family trust at the same time. By doing so, you can utilise the contribution caps and then send the remaining funds towards the family trust to maximise the tax liability and give you greater flexibility in your investments. 

For this reason, it is good to consult with a licensed SMSF adviser. We at Star Advisers ensure to lay out the best option for you as we sit down and review your current financial position and goals with you. 

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