The importance of having a well-defined SMSF investment strategy is highlighted because unexpected events such as illness, incapacity, or death of a member can occur during the long-term plan.
It is best practise to have contingency plans to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member, are you happy to continue with the SMSF?
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 more significant sums of money may need to leave the superannuation system sooner, planning has never been more critical. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.
As set out in your trust deed and related documents, the rules of your SMSF determine how the trustee structure is to be reconstructed on the death of a member and how death benefits are to be handled by you and your fund.
Careful consideration must be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are draughted 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.
You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming.
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 cannot 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 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.
Separating couple – Family law contains several options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately from your other property, so specialist advice may be needed.
Reviewing your insurance – SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance coverage should be held for each SMSF member. Your insurance coverage may be essential if an unexpected event occurs.
In some circumstances, you may already be holding insurance through membership in 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 planning for an unexpected event or reviewing your current strategies, please do not hesitate to contact us.
Kreston Stanley Williamson Team
*Correct as of August 2018
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.
