Most people try to avoid dealing with their own mortality, but death is a critical issue requiring detailed planning for SMSF trustees, writes Olivia Long.
Read any research report about why people set up an SMSF and having control of their retirement savings is near or at the top of the list. People opt for an SMSF to be hands-on with their superannuation and not just be another number in an Australian Prudential Regulation Authority-regulated industry or retail fund.
Yet these same people often fail to ask a very pertinent question: “If something happens to me, what happens to my SMSF?”
Now, I can appreciate it is human nature to shy away from any discussion about our mortality. Lord Maynard Keynes might have stated a very obvious truth when he said that “in the long run we are all dead”, but it seems we’d rather not discuss it.
Well, I’m afraid it you are a trustee of an SMSF, then it’s a question that shouldn’t be avoided, whether it’s about becoming incapacitated or dying. To do so is irresponsible, with the potential to place enormous stress on your fellow fund members.
Let’s look at a typical fund – a husband and wife. When one member dies, the fund needs to appoint another trustee within the time frame stated in the trust deed. The legislation states six months, but it depends on what is stipulated in the trust deed. If a fund has a corporate trustee, this is not an issue. If another trustee is not appointed, the fund will fail to meet the definition of an SMSF and have to be wound up.
A new appointment creates an administrative nightmare because all the fund’s assets need to be amended to reflect the status of the new trustee – the last thing most people want to be deal with at this point in their lives. It’s a lot of administration that takes time, effort and money.
The next question to ask is who’s going to become the new trustee? Consider carefully before appointing another person as trustee as the role entails the same legal rights and responsibilities as the fund’s current trustee.
Issues that may arise include:
- Will appointing one family member over another create conflict among the siblings?
- What happens with blended families or where parents and children don’t get along?
- Who has ultimate say over who is appointed if it’s something that hasn’t been discussed and decided beforehand?
- Is appointing a corporate trustee that allows for a single member/one trustee a better option to avoid future conflict?
These are all issues that should be discussed – and resolved – before a trustee dies. It takes so much stress out of what is an extremely difficult and painful time for other fund members.
There are other issues that arise when a trustee dies. The deceased’s death benefits need to be resolved as soon as possible. This may involve selling assets if the fund does not have the liquidity to meet this obligation.
Trustees can nominate who gets their benefits when they die. But many fail to do so. Only a binding death benefit nomination guarantees the benefit goes where the deceased intended.
Without a binding nomination, it’s at the discretion of the other trustee/s to reach a decision on who is the beneficiary, although any decision must be made in accordance with what the trust deed stipulates and is bound by the Superannuation Industry (Supervision) Act. For example, many fund trustees and members don’t realise the trust deed overrides the deceased’s will.
It’s also imperative to understand who can be a dependant. Broadly speaking it’s a spouse, a close personal interdependent relationship, or a child who is under 18, has a disability, or between 18 and 25 and still financially dependent on the deceased.
Remember, too, dependants can be paid a lump sum or an income stream, but if a non-dependant is to be the beneficiary, then they can only be paid a lump sum. And this can trigger tax issues.
There is much to consider. So it requires planning – careful planning. SMSF trustees need to take control of their fund affairs, whether it’s tomorrow’s decision to buy a stock, next year’s investment strategy, or our final exit from the stage of life. Get it right in life and you will make it that much easier for your loved ones. It’s as simple as that.
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