How to failsafe your SMSF against life's milestone moments
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Marriage and divorce, death and taxes-- successfully establishing and maintaining a self-managed super fund (SMSF) requires you to navigate your way through everything life throws at you.
Particularly as you approach retirement, as an SMSF trustee, you must take additional steps beyond those required by people in an Australian Prudential Regulation Authority (APRA) -regulated super fund.
According to Peter Hogan, head of technical, SMSF Association: "The key here is that you are not only a member, but you're also an individual director of your SMSF, or you're a director of the corporate trust deed, so you have a responsibility in the day-to-day running of your fund, and to carry trustee responsibilities in relation to your fund."
These responsibilities also include the overall requirement to look after the investment component for the benefit of all members, not just yourself. Each member of the fund, as trustee, has that responsibility.
In the case of entering a new marriage or de facto relationship--which importantly also includes same-sex unions--one of the most important decisions is whether the new partner needs to become a member of the fund.
"That will depend to some extent on any other previous relationships, any former spouses you may have that may also still be a member of the fund. One of the things that often happens, is a new spouse is included as a new member of the fund," Hogan says.
One of the first issues to consider is that, while most modern trust deeds are very generous in the rules of who can be a member, you nevertheless will need to follow the rules set out in your trust deed.
As a trustee, you need to follow the trust deed rules for accepting a new member, and this new member will also become a new trustee or director of corporate trustee. Importantly, they must accept this appointment in writing.
"It is not usual these days for there to be any special criteria around who can and cannot be a member, but you need to check. For example, some will restrict employees from being members of an SMSF," Hogan says.
In cases like this, he suggests you may need to consider updating your trust deed before making changes to the SMSF's membership structure.
As the regulator of Australian companies, the Australian Securities and Investments Commission (ASIC) must also be notified in writing of the appointment of a new director of the corporate trustee.
According to Hogan, there is also an additional requirement that a trustee declaration is executed by the new individual trustee, or director of the corporate trustee, and retained with the records of the fund.
Binding death benefit nomination
The execution of a new binding death benefit nomination (BDBN) is another area you may need to consider when making such changes to your SMSF, "such that you direct what happens to your SMSF entitlements when you pass away."
"You must follow exactly the requirements of your super fund when executing a new BDBN…this will either be in favour of each other, or of your estate," Hogan says. A new BDBN will automatically revoke any earlier agreement.
Hogan also highlights the need to ensure your will is up-to-date if you are intending to direct your SMSF balance to your estate upon your death.
"Super directed to a spouse is tax free, but for example, super directed to an adult child is subject to tax, and so needs to be dealt with appropriately, to ensure that the right tax outcomes are achieved."
Power of attorney
Enduring power of attorney provisions may also need to be revised if entering a new marriage or de facto partnership, or ending one.
"Loss of capacity is a big issue for SMSFs, as there can be physical or mental loss of capacity, and you need to clearly ensure that there is someone you want to take over control [in the event of a loss of capacity], because they truly do take your place," Hogan says.
As in the circumstances outlined above, any new EPOA must also accept in writing, and accept a trustee declaration. "It is important, where you have given an EPOA to a former spouse [and remarried or entered a new de facto relationship] that this is formally revoked. You need to talk to a lawyer to do that, and a new EPOA is enacted in nominating your new spouse."
"You should also consider any insurance arrangements you have within your SMSF, such as total and permanent disability insurance, income protection or life insurance, "to ensure that in the event of an insurance event--death, disability or loss of income--that your new partner or new spouse is not impacted by catastrophic financial consequences."
Particularly given the large cohort of Australians over the age of 50, ageing is an important consideration for SMSF trustees.
"Getting older can be challenging when running your SMSF…more and more people are retaining their SMSF into retirement, and more than 50 per cent of the 600,000 SMSFs in Australia now have at least one person who is in pension phase.
"These are very real issues for many SMSFs who have older people now as members, and trustees of the fund. As we all live longer…then particularly loss of capacity due to dementia and similar sorts of illnesses are arising, and these need to be anticipated," Hogan says.
In addition to preparing for diminishing health of the trustees, you should also consider the desire for a remaining trustee to continue with the considerable commitment of running an SMSF if the other trustee passes away.
The remaining trustee, who is often a spouse, may have difficulty maintaining the SMSF, if this administration was previously performed by the spouse who has died. Alternatively, there may simply be a loss of interest in running the fund.
While the remaining spouse may be happy to hand over the responsibility of running it to someone else, there may also be a reduction in assets after running a pension for many years, which removes the benefit of continuing in a SMSF structure.
In such cases, winding up the SMSF may be the most appropriate course of action.
Minimise the stress
"The death of a key member in an individual fund can be problematic, because you must have a second person to act as individual trustee," says Hogan.
Of course, the death of a member can be a highly traumatic time, but SMSF changes upon the death of a trustee must be dealt with in a timely manner.
"You generally have six months to sort out the mechanics of your SMSF [upon the death of a trustee] …and that will come and go quite quickly.
"This is why we strongly recommend that you use a corporate trustee, because it avoids having to deal with quite a number of problems in the event that a member of the SMSF dies…and therefore makes a time when clearly, you're very upset and are no doubt trying to deal with the loss of a partner…and also having to deal with your SMSF issues," Hogan says.
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Glenn Freeman is Morningstar's senior editor.
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