Have you considered what you will do if an unexpected event occurs?
Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.
It is best practice to have contingency plans in place to deal with unexpected events. Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.
Death – Think about where you want your superannuation to go on your death. Given the introduction of the $1.6 million transfer balance cap which means larger sums of money may need to leave the superannuation system sooner, planning has never been more important. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.
The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member as well as how death benefits are to be handled by you and your fund.
A lot of careful consideration needs to be given to understanding the member's wishes to ensure that your fund's trust deed and broader governing rules are drafted appropriately to achieve these requirements.
Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.
A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate-planning of its members.
Diminished capacity – Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF.
Member leaves – How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset, or introduce a new fund member to allow the exiting member to transfer out of the fund.
Going overseas – from time to time, fund members may travel overseas. SMSFs are required to meet the definition of a resident fund to avoid being made non-compliant. A key requirement of the residency test is to have the Central Management and Control ‘ordinarily’ in Australia. SMSF trustees will need to alert our office prior to going overseas for an extended period, to deal with any contingencies.
Separating couple – Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, so specialist advice may be needed.
Bankruptcy – the Bankruptcy Act (1996) is the main legislation covering insolvency. A bankrupt becomes a ‘disqualified person’, being unable to act as an SMSF trustee/director and member. The SMSF can be made non-compliant if the member remains in the fund. In addition, any ‘out of character’ contributions made with the intent to defeat creditors can be clawed back.
Reviewing your insurance – SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.
In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.
Administration of your SMSF – If an unexpected event happens you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.
As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).
How can we help?
If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give our office a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.
Hillyer Riches Management Pty Ltd , accountants and advisors located in Caulfield, is a Corporate Authorised Representative (No 466483) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. AFSL / ACL No. 223135.This document contains general advice only and is not personal financial or investment advice. Also, changes in legislation may occur frequently. We recommend that our formal advice be obtained before acting on the basis of this information.