Estate Planning

No plan for member deaths precarious

SMSFs that do not consider what happens if a member passes away will face numerous challenges in the fund’s wind-up, according to a superannuation technical expert.

During a specialist technical workshop at the SMSF Association 2017 National Conference in Melbourne last week, BT Financial Group head of financial literacy and advocacy Bryan Ashenden said the death of a member did not necessarily spell the end of the SMSF, however, if the fund was not set up properly at the outset, having to wind it up could be a headache for already grieving loved ones.

Each year thousands of SMSFs were wound up and not all of them were done so in the best interests of their members, Ashenden said.

The main reasons an SMSF might be wound up after the loss of a loved one included poor estate planning, lack of an appropriate power of attorney, incomplete or expired benefit nominations, illiquid investments, a limited understanding of the SMSF structure and personal insurance that was incompatible with the trust deed and legislative change, he noted.

“Of course, in some instances winding up the SMSF may absolutely be the right decision,” he said.

“If the member who has passed away has primary responsibility for managing the SMSF, and the other member or members simply aren’t interested in continuing it, then it is absolutely the right decision to wind it up.

“But many clients may want to continue on and there needs to be options for them to stay on as trustees.”

He said there were simple steps that could be applied either at the beginning or along the way to prevent unnecessary closures.

The trust deed was key, alongside a well-thought-out investment strategy, regular and thorough reviews, ongoing record-keeping including timely tax returns, financial statements and member statement audits, he noted.

He also reminded delegates that from 1 July, the changes to superannuation law might also mean previously well-planned death benefit strategies were no longer able to be achieved.

“As Australians can only have a maximum of $1.6 million in pension phase, the death of a loved one – whose super balance may be topped up by an insurance payout – may result in money leaving the super system, rather than being paid as a pension,” he said.

“SMSFs are definitely not a ‘set and forget’ option and the implications for establishing a binding nomination are important to understand.

“It’s worth considering whether the death benefit nomination has more than one option and to prioritise them accordingly.

“Prioritising the death benefit nomination can avoid any questions around the estate being unnecessarily challenged.”

He listed important key factors to note in order to cope with the departure of a fund member: the intention or wishes of the members should be met, benefits should be able to be paid in an orderly fashion, the SMSF should be able to continue to operate, trustees should be appointed and removed as required, and records should be available for at least 10 years prior to the wind-up.

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