Preparing your SMSF for the future

What happens to a self-managed super fund (SMSF) when a trustee dies or becomes mentally impaired? While these are circumstances that many of us would rather not think about, some time spent planning now could make a big difference to you and your family later.

Australia’s 620,000 SMSFs hold an estimated $933 billion in assets, so there is a lot at stake.

But it’s not just about money – control of the SMSF may also be crucial.

The best way to ensure that your wishes are carried out is with a properly documented succession plan and an up-to-date trust deed.

An SMSF succession plan sets out what will happen if you or another trustee dies or loses mental capacity. It makes sure that there’s a smooth transition and is quite separate from your Will.

It’s important to be aware that instructions in a Will are not binding on SMSF trustees, so it’s essential to have a valid (preferably non-lapsing) binding death benefit nomination in place so the new trustees are required to pay your death benefit to your nominated beneficiary.

Your Will cannot determine who takes control of your SMSF or who receives your super death benefit as the fund’s trust deed and super law take precedence.

Succession plans also reduce the potential for the fund to become non-compliant due to overlooked reporting or compliance obligations. They can even provide opportunities for death benefits to be paid tax effectively.

Selecting successor trustees

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so it’s important to consider what will happen after the death or incapacity of one of the trustees.

If the fund has more than two members, you need to consider whether potential successor trustees have the required capabilities and whether their views are in alignment with the fund’s established goals.

Discussing the potential responsibilities and expectations with your likely trustee successor is a wise move and can help protect your SMSF from expensive and complex litigation in the future.

It’s also essential to check that a new trustee will be eligible to act as an SMSF trustee under super law.

An alternative to appointing a successor trustee can be introducing a sole purpose corporate trustee structure for your SMSF, as death or incapacity is then not an issue. This structure makes it easy to keep the SMSF functioning and fully compliant when a trustee transition is required.

Appoint a power of attorney

Good SMSF succession planning also means ensuring your Will is updated to reflect your current family or personal circumstances.

It requires having a valid Enduring Power of Attorney (EPOA) in place to help keep the SMSF operating smoothly if you lose mental capacity. Your EPOA can then step in as fund trustee and take over the administration of the fund or make necessary decisions about the fund’s investment assets.

EPOAs are particularly important for a two-member SMSF where one trustee is responsible for all the administration and decision-making. If this trustee loses mental capacity, the less active trustee may be unable to take control.

Check compliance with legislation

When developing a succession plan, ensure your wishes comply with all the requirements of the SIS Act and will not inadvertently compromise your SMSF’s compliance status.

You need to check that your SMSF’s trust deed includes the necessary powers to achieve your estate planning goals. These powers can include permitting an executor to be appointed in place of a deceased trustee, identification of who has the power to appoint a new trustee when a member dies, and the ability to pay a reversionary pension to provide greater payment certainty.

A good succession planning process also involves regularly reviewing both the fund’s trust deed and any changes in both the SMSF’s circumstances and membership and the super legislation and regulations.

Tax and your SMSF

Tax is an important consideration when it comes to estate and succession planning as the super and tax laws use different definitions for who is and isn’t considered a dependant.

Your SMSF can pay super death benefits to both your dependants and non-dependants, but the subsequent tax bills vary based on the beneficiary’s dependency status under tax law.

The problems that can occur, due to the differences between super and tax law dependency definitions, were highlighted in recent private advice (1052187560814) provided by the ATO. It found that even if a beneficiary was receiving “a reasonable degree of financial support” from a deceased person just before they died, they would not necessarily be considered a death benefit dependant under tax law.

There is also the potential for capital gains tax to be payable if fund assets need to be sold because your super pension ceases when you die. Nominating a reversionary beneficiary for your pension ensures payments continue automatically without requiring any asset sales.

7 tips for estate and SMSF succession planning

1. Consider whether you intend to wind up your SMSF as you get older or add family members to take over the administrative tasks.

2. Develop a fully documented succession plan covering control of your SMSF and distribution of your super assets.

3. Select the person you want to become your successor director and fully document their responsibilities.

4. Ensure both your Will and the enduring power of attorney (EPOA) nominate the person you want to take over control of your SMSF.

5. Consider moving your SMSF to a corporate trustee structure to avoid future control problems between family members.

6. Ensure you have a valid non-lapsing binding death benefit nomination (BDBN) in place, so the trustee is required to pay your death benefits to your nominated beneficiary.

7. Bring together all your professional advisers and family members when drawing up the succession plan to ensure everyone understands your wishes.
If you would like to discuss or require assistance with drawing up your SMSF succession plan, reach out to Oracle Advisory Group today. 
Important information – Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.