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, spending some time planning now could make a significant difference for you and your family in the future.

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

But it’s not just about money; control of the SMSF is also important.

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 ensures a smooth transition and is separate from your will.

It’s important to be aware that instructions in a will are not binding on SMSF trustees. Therefore, 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. ⁱⁱ

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. ⁱⁱⁱ

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 mental incapacity of one of the trustees.

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

Appoint a power of attorney

SMSF succession planning also means ensuring that 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 step in as a fund trustee and take over administration of the fund or make necessary decisions about the fund’s investment assets.

Checking compliance

When reviewing or creating a succession plan, it’s essential to ensure your wishes are fully compliant with the SIS Act and do not inadvertently compromise your SMSF’s compliance status. This should be part of your regular reviews with your adviser, who can ensure your trust deed, the SMSF’s circumstances, and the ever-evolving super legislation are all in sync.

Tax is an important consideration in estate and succession planning, as 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.

Problems that can arise 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. ^v

Inadequate planning can have far-reaching implications, impacting not only your assets but also your loved ones and their future. If you would like to discuss or require assistance with drawing up your SMSF succession plan, contact one of our financial advisers today.

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