Self-managed super funds (SMSFs) are not a set-and-forget proposition. They require constant tweaking at different life stages to ensure they still suit members’ retirement needs. Here, we explore some of the factors trustees should consider as members progress through their lives.
Winding up a fund
Decisions to wind up a fund fall into a number of categories, says Pete Pennicott, a director of financial advice firm Pekada.
“Members may be forced to close down the fund if it is not delivering value for time and effort or due to cost factors,” he says.
A decision to close the fund may also be taken should it no longer comply with superannuation law, for instance due to a permanent move overseas. A change in the trustees’ and members’ circumstances, for example a relationship breakdown, is another common reason why funds are closed.
“Loss of capacity and the death of the fund’s trustees or members may also be a point to assess whether the SMSF is still viable. This is often the case when the main person driving SMSF decision-making and day-to-day management is no longer able to fulfil these roles, and other trustees do not feel confident taking over,” says Pennicott.
If trustees are concerned the fund is no longer delivering value, assess the merits of having an SMSF against other options by doing a cost-benefit analysis. “This is an exercise which should be done regularly as good non-SMSF superannuation options are always emerging and fund balances reduce in retirement. Just because the fund made sense at the time it was opened, doesn’t mean it will always remain the best option,” he adds.
As with any financial decision it is best to approach closing a fund from a balanced viewpoint, rather than being swayed into thinking the cheapest option is the best one. There may be significant benefits or consequences that are not immediately obvious such as unrealised capital gains complications or capital losses that reside in the fund, for instance.
Says Pennicott: “It may be worth exploring solutions to continue the fund and allow for members to take advantage of the flexibility of the fund, including any ongoing tax benefits.”
Trustees who set up an SMSF for valid reasons years ago, however, may have done so to have greater control over investment options now widely accessible via retail superannuation options without the responsibility of being a trustee.
“As clients get deeper into retirement they may find the balance within the fund has reduced to a point where the economies of scale no longer support the need for an SMSF,” he adds.
Learn more about how to wind up an SMSF.
Coping with the sudden death of a member
On the death of a member, his or her legal personal representative is appointed as trustee for the deceased and looks after their interest in the SMSF until such time that their benefits are paid to beneficiaries.
“Someone’s interest in an SMSF is likely to be one of their biggest assets and so it should be part of a broader estate planning strategy. All too often, the SMSF is looked at in isolation and not integrated into the will and estate, which results in opportunities being missed or additional tax being paid,” Pennicott warns.
Also, trustees losing capacity can often happen suddenly. If this happens, they can no longer act as a trustee. Ideally, appropriate power of attorney arrangements are in place to allow the fund to continue operating in the interim until decisions have been made about how to best deal with the fund’s balance. “In extreme cases where loss of capacity occurs and no one can step into the role of trustee, then winding up the fund will be a necessary next step,” he adds.
Learn more about superannuation death benefits.
Dealing with conflict
Conflict is a natural part of life and requires resolution when it occurs between SMSF members.
“The best thing to do is to try to avoid conflict in the first place, which is easier said than done, of course. When you go into an SMSF, carefully choose who you’re going into it with,” advises Greg Einfeld, a director of self-managed super fund specialists Lime Super.
“I see cases where four people like the idea of buying property in super when none of them individually has enough money to justify doing that, so they pool their funds and buy an asset. It sounds like a good idea at the time until conflict arises when they have different objectives. For instance one or two members may want to get money out, but the others want to leave it in the fund. So it’s important going into it that you have trust in the other people, you have common objectives and you agree on some ground rules on how the fund will operate,” he adds.
Even when spouses go into a fund together, the most common way of operating the SMSF, relationships can break down and that can lead to conflict.
When that happens, assuming there’s a corporate trustee, both parties should refer to the constitution of the trustee company, as that will set out the rules for how decisions are made about the trust , which the company controls.
“You hope it doesn’t get to that point. But if it does, it’s important to look at the fund’s rules. They will differ from one fund to another,” he adds.
The other common time when conflict affects an SMSF is on the death of a member. Says Einfeld: “We’re seeing more conflict between beneficiaries and family members as to how a member’s balances in the fund should be divvied up. No binding death nomination can cause problems and sometimes these decisions are challenged in the courts.” So it is a good idea to have a binding death benefit nomination that takes away the uncertainty.
As this shows, it’s important for members to recognise circumstances change and there may come a time when an SMSF is not suitable, or the structure needs to change. People who plan early for this eventuality have a good chance of a smooth transition of assets when it comes time to close the fund or shift its focus.