There are many reasons why trustees may decide to wind up their SMSF. The most common reasons for wind-ups are divorce, death, diminished mental capacity, low member balances making the fund no longer a cost-effective option and the inability to meet the residency rules.
It makes it easier to wind up an SMSF if the trustees have planned for this event from the start and this is where a great exit plan is beneficial.
Exit plan
An exit plan needs to be tailored to each specific SMSF. Trustees will need to consider the individual circumstances of the fund and its members. In addition, they must make sure it is documented, for example, in a trustee minute.
The following should be included in an exit plan:
- instructions around death benefits, for example, death benefit nominations and/or reversionary pensions. Trustees should ensure there is no conflict between their operation and ensure consistency with the trust deed,
- the appointment of an enduring power of attorney,
- the estimated costs of winding up the SMSF,
- the process required to liquidate the assets of the fund, and
- a review of the trust deed.
Trustees should review the plan regularly and update it where necessary.
Some questions to consider each year as to whether an SMSF should be closed include:
- Is an SMSF still the right option for the members?
- Do the trustees still have the capacity and time to manage the fund?
- Is it still cost-effective?
- Does the trust deed allow for the actions in the exit plan?
Even if an SMSF has historically been an excellent investment vehicle, diminished mental capacity or the death of one member can change the circumstances and present a situation where the winding up of the fund is now the best option.
It would be best if the trustees have considered an exit plan and discussed how to implement and execute one with a specialist SMSF adviser. Involving a practitioner such as this, particularly during the establishment phase of the fund, is invaluable.
A great exit plan will assist greatly in the wind-up process and also critical components of the fund, such as reversionary pensions, binding death benefit nominations, enduring powers of attorney and an up-to-date trust deed.
Susan O’Connor is the principal of Susan O’Connor Accounting.