‘Til death do us part: what happens to an SMSF when a member dies?

3min read

The death of a member need not spell the end of an SMSF, however if it is not set-up properly at the outset; having to wind-up an SMSF can be a headache for already grieving loved ones.

Each year 1000s of SMSFs are wound up and not all of them because it is in the best interest of clients.

Speaking at the Self-Managed Super Fund Association national conference today, BT’s Head of Financial Literacy and Advocacy, Bryan Ashenden said when setting up an SMSF there are a number of factors that can go wrong that could lead to its wind-up. Ultimately all signs point to getting good advice upfront and along the way to prevent its unnecessary wind-up.

The main reasons an SMSF may be wound-up after the loss of a loved one are:

  • poor estate planning;
  • lack of an appropriate power of attorney;
  • incomplete or expired benefit nominations;
  • illiquid investments;
  • limited understanding of the SMSF structure,
  • personal insurance that is incompatible with the SMSF trust deed and legislative change.

"Of course in some instances winding up the SMSF may absolutely be the right decision. If the member who has passed away has primary responsibility for managing the SMSF, and the other member or members simply aren’t interesting in continuing it, then it is absolutely the right decision to wind it up. But many clients may want to continue on, and there need to be options for them to stay on as trustees.

"There are a few simple steps that can take place either at the beginning or along the way to prevent unnecessary closures" says Mr Ashenden.

The SMSF trust deed is key, alongside a well thought out investment strategy, regular and thorough reviews, ongoing record-keeping including timely income tax returns, financial statements and member statement audits.

From 1 July 2017, the changes to super law may also mean that previously well planned death benefit strategies are no longer able to be achieved. As Australians can only have a maximum of $1.6M in pension phase, the death of a loved one (whose super balance may be topped up by an insurance payout) may result in money leaving the super system, rather than being paid as a pension.

"SMSFs are definitely not a set and forget option and the implications for establishing a binding nomination are important to understand. It’s worth considering whether the death benefit nomination has more than one option and to prioritise them accordingly.

"Prioritising the death benefit nomination can avoid any questions around the estate being unnecessarily challenged," said Mr Ashenden.

Key ingredients to cope with the departure of one of the SMSF members:

  • the intention or wishes of the members should be met;
  • benefits should be able to be paid in an orderly fashion;
  • the SMSF should be able to continue to operate;
  • trustees should be appointed and removed as required;
  • keep records for at least 10 years prior to the wind-up.

Ends

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Information is current as at 16/2/2017.

Nicole Webb
nicole.webb@btfinancialgroup.com
0466 479 673

Lisa Parrett
lisa.parrett@btfinancialgroup.com
0432 933 796