Many people do not start out with a self-managed super fund (SMSF) thinking about the worst that could happen! Usually, clients are keen to get the SMSF established and often have questions about the day-to-day operation of the fund. Rarely do they ask about the factors that might derail the smooth operation of the fund, such as death or incapacity, and the effect that these significant events will have on their SMSF.
So, what do you need to consider to ensure that your SMSF can survive the unexpected?
The key to managing the unexpected is planning. Planning is crucial to a less stressful, drama-free SMSF journey to retirement and beyond.
Here are the five things you should consider when setting up a SMSF.
Death
You may be surprised to hear that many people do not make an estate plan or keep their estate plan up to date. As superannuation does not automatically form part of your estate when you die, where will your super go?
Deciding what will happen to your super after your die is not necessarily straightforward. It may be advisable to consider the use of binding death benefit nominations to nominate what will happen to your superannuation when you die. You might also consider using pensions following your death if allowed.
You may also need to think carefully about the transfer balance cap and what effect that may have on your SMSF. This may mean money you had expected to remain in super being forced out of the super environment because of death. This, of course can have huge ramifications depending on your beneficiaries and the nature of the assets that comprise your SMSF.
Death may also mean tax obligations arising in relation to the payment of your SMSF death benefits. Careful estate planning may mean reducing the tax payable on your death benefit when you die.
In addition to this, a close examination of whether your SMSF would benefit from appointing a corporate trustee should take place. There can be significant benefits in having a corporate trustee of your SMSF, not least because a trustee of this type will continue, regardless of death to control an SMSF. If you do not have a corporate trustee in place for your SMSF, then you would be well placed to seek advice about how this could assist the running of your SMSF.
Incapacity
When you operate a SMSF, you will be a trustee or a director of the corporate trustee company. If you lost capacity, what would this mean for the SMSF? How would decisions be made if you cannot make them anymore? It may be appropriate to appoint an Enduring Power of Attorney who could act for you as trustee.
Member resignation
A member leaving the SMSF can have significant consequences for the SMSF. For example, if the SMSFs asset base consisted of a significant amount of real property, then what would be the impact of a member leaving on that real estate? Would you look to bring in one or more new members to the SMSF, or would you sell down some or all of the real property? Thinking about these scenarios now can reduce the risk of problems later.
Insurance
Under the SMSF investment strategy, the trustee of the SMSF should regularly review insurance. Having appropriate insurance may mean that you and your SMSF are better placed to manage both expected and unexpected events impacting on the fund.
SMSF Administration
If you experience a significant life event, it may lead to a change in circumstances. In some cases, this might mean that having an SMSF becomes undesirable, and you may wish to wind up the SMSF. For example, it may be too expensive or time consuming to continue and it may be appropriate to leave the SMSF environment in favour of an alternative such as, a retail or industry fund.
How we can help
If you would like to ensure that your SMSF is able to manage the expected and the unexpected things that life (and death) may create, please contact Rebecca Edwards, Special Counsel.