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).