Your SMSF wind it up or pass it on

By Andrew Sherlock

Legislation has come into effect allowing a maximum of six members in an SMSF. What does this mean for your SMSF, and will this make it easier when it comes time to pass your super on to the next generation?

The simple answer is yes, but before you start adding your children and their spouses to your fund, sit down with your financial adviser and discuss if this is the right strategy for you. It’s essential to develop a detailed SMSF succession plan to head off any potential problems.

Why make an SMSF succession plan?

Most SMSF trustees understand the concept of estate planning and the importance of deciding how you want your assets distributed when you pass away. But many overlook the importance of also having a detailed succession plan for their super death benefits and SMSF.

Although your estate plan will cover who gets your assets when you die, your Will doesn’t determine who receives your super, or who takes control of your SMSF. The issue of control is also important if you become seriously ill or lose mental capacity.

By putting a detailed succession plan in place, you can ensure there is a smooth transition in the control of your SMSF and the payment of your super death benefits to your nominated beneficiaries. It also reduces the potential for the fund to become non-compliant, as well as provides opportunities for death benefits to be paid tax effectively.

Whether to wind up your fund

Traditionally, most two-trustee SMSFs were wound up as members got older and became less keen on undertaking the myriad tasks involved in keeping a super fund compliant.

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so many funds are automatically wound up after the death or incapacity of a trustee.

But the introduction of six-member SMSFs provides families with more flexibility to use their fund as a tool for intergenerational wealth transfer.

Adding your adult children to an SMSF means they can take over some of the administrative burdens as you age. It can also simplify the transfer of assets to younger family members.

There are potential downsides that need to be considered, however, as the trustees in control of your SMSF after your death, are the ones making decisions about the distribution of your super death benefits. If the wrong person gains control of the fund, the most careful estate planning can be put at risk.

Appointing a power of attorney

Ensuring you have a fully documented Enduring Power of Attorney (EPOA) in place in the event of serious illness, death or loss of mental capacity is an essential element in a good SMSF succession plan.

Having an EPOA makes it much easier to keep a fund operating smoothly, as the attorney can step in as trustee and take over administering the fund, together with making decisions about fund investments and payment of death benefits.

EPOAs are particularly important in a two-member SMSF if one trustee is responsible for all the fund’s administration and decision-making. If this trustee dies or loses capacity, the less active trustee may be unwilling to take control.

Developing an effective succession plan

With a carefully constructed SMSF succession plan, you can reduce the potential for disputes and ensure a smooth transition of control to the next generation.

It’s important to remember any instructions you leave in your Will about payment of your super benefits – or control of your SMSF – are not binding on the fund’s trustees after your death.

That’s why it’s essential to have a binding death benefit nomination (preferably non-lapsing), in place to provide direction for the trustee after your death.

Part of your regular succession planning should be to review your SMSF’s trust deed to ensure it remains up-to-date. You also need to check it includes the necessary powers to achieve your estate planning goals. These powers include the ability to provide income streams to beneficiaries (such as a reversionary pension) and appoint the executor of your Will to take your place as fund trustee.

Tax and your SMSF

Tax is also a vital consideration in estate and SMSF succession planning.

Super and tax laws use different definitions of who is and isn’t considered a dependant and how the benefits they receive are taxed, so this needs to be carefully managed.

An SMSF can pay super death benefits to both your dependants and non-dependants, but the tax implications vary. Super benefits generally have both tax-free and taxable components, so talk to us before nominating a beneficiary to ensure your super will be paid tax-effectively.

Nominating a reversionary beneficiary for your super benefit can also be tax effective. A reversionary pension means your beneficiary (usually your spouse), automatically receives your super pension so fund assets won’t need to be sold to pay the benefit. Asset sales can create a CGT bill.

If you would like to discuss your SMSF succession plan, reach out to the Sherlock Wealth team here.

5 tips for estate and succession planning

  1. Ensure your Will is current, and you update it whenever your family or personal circumstances change.
  2. Clarify your estate planning objectives and seek professional advice about how to achieve your goals.
  3. Think about whether you want to wind up your SMSF as you get older or add family members to take over the administrative tasks.
  4. Develop a fully documented succession plan covering control of your SMSF and distribution of your super assets.
  5. Ensure your super death benefit nomination is valid, properly documented and considers the tax implications for your beneficiaries.
Andrew Sherlock is the Owner & Head of Advice at Sherlock Wealth. A Sydney based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs and for more than two generations.
A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst and a lifetime member of the international MDRT Top of the Table. He holds a BA Economics degree from Macquarie University with majors in accounting and finance.
Helping clients to achieve their lifestyle goals through smart financial planning, wealth structures and strategic advice, while providing peace of mind, are the cornerstones of Sherlock Wealth.  Andrew can be reached at ask@sherlockwealth.com.
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