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Meg on SMSFs: Future proofing your own fund

While reading Firstlinks recently, I was fascinated to see how much just one line of Graham Hand’s editorial in Edition 447 (here) resonated with other readers:

“Regardless of personal circumstances – health or financial – we should all take the time to ensure spouses or partners know in advance what steps to take if someone dies or becomes otherwise incapacitated.”

Comments sought more information. Digging deeper into exactly what could be done here is worthwhile for a number of reasons. First, I’m an actuary and love reading how many comments on Graham’s article quoted statistics about life expectancy. Second, I’ve also worked with SMSF advisers, accountants and trustees for over 20 years so have seen the good, bad and ugly of death and incapacity in SMSFs. And finally, I’ve been the widow left behind when the driving force behind our SMSF died suddenly in his 50s.

Make these transitions easier

When it comes to incapacity there are two vital steps to have in place right now for couples who have an SMSF together. In my view, anyone who wants to have an SMSF must have these no matter how young and healthy they feel.

The first is a corporate trustee for the SMSF. Both death and incapacity involve changes to the make-up of the SMSF trustee and this is infinitely easier to manage when the trustee is a company.

The second is an enduring power of attorney allowing the spouse to keep managing things if one member of the couple is no longer capable of doing so. The enduring power of attorney should be drafted to be effective 'now' rather than only at some point in the future when incapacity strikes.

Consider Chris and Kristy who have an SMSF together and hold enduring powers of attorney for each other. If (say) Chris becomes mentally incapacitated, Kristy is able to continue as the sole director of their corporate trustee even though both of them remain members.

Remember too that incapacity is often a gradual process. There won’t necessarily be a clear signal that 'today is the day' Chris can no longer fulfill all the duties required of an SMSF trustee. But the fact that Kristy has an enduring power of attorney means she can become the sole director at any time. It’s the existence of the document, not the actual state of Chris’s health, that allows their fund to deviate from the usual rule that all members must be directors of the corporate trustee.

What about planning for death

There are the usual important things to do around making sure the death benefit is paid the way the deceased would have liked. This is where devices like binding death benefit nominations and reversionary pensions become key. They can be the subject of a future article. The issue in Graham’s editorial that seemed to resonate was how to ensure 'less involved' partners left behind can continue to run the SMSF.

And let’s be honest – running an SMSF is like every other piece of domestic management couples do. There will usually be shared care and interest in the outcome but the work will be split. Inevitably one person does more than the other when it comes to paying the SMSF bills, following investment markets, reading up about new strategies etc. Is there anything that can be done to future proof the SMSF for the death of the 'more involved' party?

Yes.

Perhaps the most obvious point is to ensure the less involved partner is never completely absent. Start with the practical things: both parties should have their own logins to relevant online systems and be signatories on accounts. These days, financial institutions often double check identity using emails and mobile phone numbers so make sure both parties’ details are registered, not just one.

Make sure the less involved partner knows where to go to get help if and when they need it.

Some of the best transitions I’ve witnessed have been where the couple has agreed beforehand what kind of help the survivor would value most and even sought out those professionals while the more active spouse is still alive.

At Heffron, a common role we’re asked to fill as the administrator of the SMSF is a 'place to call' when someone dies. We’re often relied upon to introduce the survivor to the right financial adviser when the time comes. Or to take on more administrative work (such as dealing with the SMSF’s mail) when the partner who enjoyed that type of work dies.

After a death, time is allowed

Another tip for the surviving partner is while there is plenty to do when someone dies, a lot of it doesn’t need to happen urgently, particularly if the SMSF has a corporate trustee. Apart from letting ASIC know that one of the directors has died (your SMSF accountant will be able to do this), almost everything else can wait for a bit. For example, the deceased’s balance has to be dealt with as soon as practicable (either paid out of the fund or turned into a pension or a combination of the two) but the ATO generally recognises that this can take up to 6 months and sometimes longer.

On this front, life can be much trickier if the trustee is not a company. It's another very good reason to have a corporate trustee well in advance. I once had a client with individual trustees where the financial institution controlling access to the fund’s investments wouldn’t allow her to sell assets to pay out her husband’s super until she changed the trustee to add another person (because SMSFs are not normally allowed to have just one person as the sole individual trustee). At the same time, another party involved in the fund wouldn’t let her change the trustee until she’d paid out her husband’s death benefit. Both parties were actually wrong but the problem wouldn’t have arisen at all if the trustee had been a company.

Don’t dive into winding up the SMSF. Even if that’s a sensible decision in the longer term, the surviving spouse should take the time to make sure it’s what they want and understand the implications of doing so. It may mean giving up some tax benefits or special rules. For example, income from SMSF pensions that pre-date 1 January 2015 isn’t counted when testing eligibility for the Commonwealth Seniors Health Card. That special exemption goes if the pension is moved to another fund.

Perhaps most importantly for the surviving spouse is that just because we call SMSFs 'self managed' doesn’t mean he or she must take on the same very active 'management' role their partner had. It’s common to engage more support (or even just different support) after the death of one member of a couple.

When my husband was alive, management of our SMSF was shared but we had completely different roles. Not surprisingly (given my job) I looked after compliance and strategic issues. I had little interest and no expertise in investing. I’m embarrassed to admit that I didn’t even have a login to the relevant accounts and of course his were locked as soon as I notified the institution of his death. Today, I rely heavily on my financial adviser, far more than my husband ever did. But it works.

 

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances.

To view Heffron's latest SMSF Trustee webinar, 'Super contributions unpacked', click here (requires name and email address to view).

 

19 Comments
Ian Parker
April 18, 2022

Hi Meg, This from Services Australia Income Test web page relating to Account based pensions:
"Deeming rules will only apply if any of the following occurs:
you bought or changed it on or after 1 January 2015
you own it and we granted your Commonwealth Seniors Health Card after 31 December 2014
your partner owns it and they are 60 years old or more."
Noting the use of the word "any" implies other factors could override the early start date. We are about to apply to see what happens! Thanks for your excellent article.

Vince
March 30, 2022

Great read, Meg. Thank you.
You refer to transferring :” …on before the death of the second member of the couple rather than the death of the first. There are some great tax concessions to make use of in that phase in between.”
Would like to know more about these in a future article.

Evan Parker
March 14, 2022

Would love a future article to cover the mechanics of changing from individual trustees to a corporate trustee including CGT implications, grandfathered pensions and any other issues.

Trevor
March 13, 2022

Meg: This was a great start! I am avidly looking forward to the next in the series. 


Rob: "Yes but Meg, if the surviving spouse has no "headroom", ie is at or over the $1.7m, it remains a problem. Critically, those who have to make a decision at a stressful time need to understand the quantum involved and who to turn to for expert advice. They also need to understand that time matters." Rob, in that case, if you intend to "leave something in your will to your heirs" you can actually give it to them while you are still alive. This avoids the $1.7m problem, and many other problems, and you get the satisfaction of knowing that it went exactly where you intended it to go [and you get the added benefit of enjoying their gratitude!]. 

AlanB
March 11, 2022

A SMSF is making life, and death, too complicated. What happened to the concept of enjoying your twilight years and walking off into the sunset with a fishing rod and contented smile?

John Wilson
March 10, 2022

Thank you for this. I look forward to future articles touching on the issues below.
I suggest that for many people, the SMSF is only part of what needs to be dealt with in the event of deteriorating capacity or death of the people in charge. For me, the SMSF administration is probably the easiest part: we've already set up corporate trusteeship, death nominations and the other legalities, and my accountant is fine.
In my case there is a messy structure: we have an SMSF, a family trust, and some personal investments, including some overseas. These different types of assets can't be managed the same. I believe the other directors and trustees - my wife and daughters, or our executors do not have the time and skills to take over the investment decisions. I need a succession plan to be working before I am no longer able.
The first step on my jobs-to-do list is simplification of the structure by eliminating the personal investments and rolling the proceeds from those assets into the trust.
I'm not happy with the returns of managed funds compared to what I'm achieving. However, if I cannot identify competent advisers able to work with my wife or daughters, maybe that's what I'll have to do. A further requirement is the need for such advisers or their successors to still be around - in 5 or 10 or 20 years.

Sue Roberts
March 10, 2022

A very useful article, thank you Meg. I agree with Rob - rip it out of super before you drop off the perch, but that may be easier said than done!
I have run my SMSF as the sole Director of a Corporate Trustee for many years and have a binding death nomination in place with two beneficiaries, my children. I do not have a financial advisor.
My question is: one of my beneficiaries lives abroad and as such, cannot be nominated as my power of attorney, so does this affect the distribution of the funds? ie Is it only the person with power of attorney that has this job, or is that irrelevant? I share Jill's concerns regarding the tax implications for the non-resident.
Thank you again - there are often articles about impending retirement, so it was great to have one about actual retirees. Thank you so much.

Meg Heffron
March 10, 2022

Sue - great questions and a good topic for a future article. I've noted it down. One quirk you may not be aware of : adult, financially independent kids will pay tax + Medicare on the taxable part of any super inheritance they get directly but they won't pay Medicare if it goes via the estate.

Rob
March 10, 2022

Could I suggest there is an imperative not mentioned? Have a plan to rip the money out of super BEFORE death and thereby avoid the tax bill from the ATO, even if it means staying on life support while you do it! Understand that date of death not always known BUT in the case of terminal illness or steady decline, hanging around till the last second not a good idea. I have seen serious amounts of money go to Canberra simply because intelligent people, who knew they were dying, forgot the basics.

Meg Heffron
March 10, 2022

I totally agree Rob - but I'd suggest that's something to focus on before the death of the second member of the couple rather than the death of the first. There are some great tax concessions to make use of in that phase in between. The worst outcome, I think, would be doing too little planning for that first transition and making decisions under pressure. But absolutely - don't let the money go to Canberra!

Rob
March 11, 2022

Yes but Meg, if the surviving spouse has no "headroom", ie is at or over the $1.7m, it remains a problem. Critically, those who have to make a decision at a stressful time need to understand the quantum involved and who to turn to for expert advice. They also need to understand that time matters.

Jill
March 10, 2022

One area that never seems to receive any attention is the case of a single parent with adult children, some of whom live overseas and are therefore non-resident for tax purposes. Could be huge differences in their benefits after CGT on shares, property etc unless everything goes to the Estate.
I imagine many families may have children resident overseas so would be nice to see more discussion on the topic.

Mart
March 10, 2022

Thanks Meg ... this is one of the very best (in terms of honesty and usefulness) articles I've read on Cuffelinks / Firstlinks. Bravo. I also recall attending an event with Peter Thornhill (before lockdown struck !) where he mentioned that as he ages (a) he was, over, time, attempting to consolidate his / his wife's portfolio down to 6 or 7 'easy to manage' Listed Investment Companies and (b) he kept a trusted Financial Advisor close and expected his wife to simply call that person when he shuffles off the mortal coil (assuming he shuffles first) and for the Advisor to continue with their current financial strategy with minimal tweaks. In other words - trying to keep it as simple as possible for the bereaved spouse. Thanks again for some wonderful insight / Martin

Geoff parry
March 10, 2022

Would converting an existing 2 person Trustees SMSF into a Corporate SMSF cause the loss of CSHC? I don't want any unintended consequences in preparing for the time I "retire' from managing our SMSF. Other Trustee is very uninvolved.

Graham W
March 10, 2022

It is not quite correct that pre January 2015 pensions aren't assessed as income for CSHC purposes. Those pension incomes are assessed but are reduced by a deductible amount . The deductible amount was the original value of the pension amount divided by the pensioner's life expectancy. So a super pension starting amount of say $500,000 ,divided by a life expectancy of 20 years gives a " deductible amount " of $25,000 for as long as that pension continues in the same form. That is why meeting CSHC income tests is easy as only a pension in excess of $25k pa would be tested.
Changing from individual trustees to a corporate trustee should not affect this. If other sources of income were causing CSHC problems, the pensioner wanting more than $25,000 could take a capital drawdown instead.

Meg Heffron
March 10, 2022

Hi Graham - actually old (ie pre 1 Jan 2015) account-based pensions for over 60s really are completely ignored for the CSHC. It's one of the reasons that this particular grandfathering is often used as an example because it's extremely valuable for those who want to keep the card and it's so harsh if you lose it. And I agree with you 100% that changing trustees won't impact this.

Roy
March 11, 2022

Geoff I share your concern and at age 72 I have exactly the same situation. A recent stay in hospital focused my mind to the potential difficulties should I predecease my partner. I have sought advice regarding your question regarding loss of CSHC. I certainly will be interested to read any relies to the issue you raise.

Margot Sexton
March 10, 2022

I wish I knew all of this when my husband passed away in 2019. I have now slowly gone down the path to becoming Sole Director of a Corporate Trustee. Thank you for an excellent article.
Margot Sexton

Lois Woollams
March 10, 2022

Interesting.

 

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