First published in the Australian Financial Review, 5 March 2018.
Every plan has a goal. Whether your clients already have a self-managed superannuation fund (SMSF) or are considering establishing one, they should have a goal and a plan to reach it.
In many cases, the goal is having enough saved for a comfortable retirement, and after reaching that goal, it might change to paying them an ongoing retirement pension from their SMSF.
But what do they do when their super savings run out in retirement? With increasing longevity, this may become an issue for some people. Or will there be a point your clients are no longer comfortable or capable of acting as the trustee of the SMSF? Or something unexpected might happen, such as the passing of a member, which may require you to rethink the operation of your client's SMSF.
Any of these events could result in your client's SMSF coming to an end and, as a result, they may decide to wind it up and shift to a more traditional super fund. Equally though, there could be other steps they may want to take to help continue their SMSF into the future.
It is often overlooked but one of the considerations when establishing an SMSF is to consider what your client's exit plan may look like. So, what can you do? Here are a few thought starters to help you along the way.
One of the first considerations your client may have when deciding to set up an SMSF is whether to have individual trustees (which may be less expensive in setting up) or a corporate structure. While an individual trustee structure may be cheaper initially, it may not be the best outcome in the long run. Putting aside the need to potentially change the registered holder of investments when there are changes in trustees, an important issue arises if and when a member of the SMSF passes away.
If your client is in an SMSF with two members, and therefore two individual trustees, and one of the members passes away, the remaining member would need to appoint another trustee, as a minimum of two trustees is legally required. However, if the SMSF had a corporate trustee (with both members then required to be directors of the corporate trustee) and a member passed away, the surviving member can continue to be in the SMSF as the sole director of the corporate trustee. Corporate trustees may be more expensive initially, however, it may reduce costs in the future and may make succession planning easier in the long run.
Powers of attorney
What happens if your client becomes ill and cannot make the decisions required for their SMSF? Particularly if they are the sole member of the SMSF, if they were to become incapacitated, their SMSF may be at risk of not meeting legal and compliance requirements. Indeed, their retirement savings could remain stuck in the SMSF as no one may have the authority to decide to move the money.
Just as they can appoint a power of attorney to make certain decisions or take certain actions on their behalf outside super if they are incapacitated, they can have similar arrangements in place for their SMSF.
Breakdown in relationships
If your client is a member of an SMSF with multiple members, they need to be comfortable with the actions other trustees take as they are also responsible for those actions. But what if a relationship were to break down? What if your client lost confidence in one of the trustees of the SMSF? How comfortable are they that they can exit the SMSF, if necessary, to help ensure their retirement goals don't suffer?
While not something your client can necessarily plan for in advance, in the event of animosity arising between trustees, they may need to consider if it is worth them leaving the SMSF, or if other trustees are willing to do so. While this could result in the sale of some assets at an inopportune time to enable the exit to occur, it may be a better outcome than remaining in the SMSF together.
At some point, your client could be well into retirement and their super balances reduced to a level where their SMSF may no longer be economically viable. How will they exit, and where will they roll their balance to? Or will they just withdraw the entire balance out, if that option is available?
If your client is the last member or members doing this, they may to consider winding up the SMSF and lodging final returns with the Tax Office. This all takes time.
The good news is that even if your client's SMSF is already established, it's not too late to make adjustments to help them ensure their SMSF can deal with the unexpected.
Bryan Ashenden is Head of Financial Literacy and Advocacy at BT Financial Group.
Information current as at March 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. Any superannuation law considerations or comments outlined above are general statements only, based on an interpretation of the current superannuation laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian Credit Licence 233714.