skip to content

Succession planning for an SMSF

Tags Retirement Savings Retirement Planning
Category SMSF Retire

A family member helping a retired parent

Last week we discussed SMSF audits. Staying on the subject of SMSF’s, we wanted to delve into an area of SMSF that is seldom given much thought, Succession Planning. Like so much in the SMSF space, there is a lot to consider, so we’ve asked guest writer and Financial Planner, Liam Shorte,  to share his specialist knowledge on SMSF’s

Succession Planning for an SMSF

With an SMSF all members are required to be trustees, so you must plan for situations where members pass away or possibly lack the mental or physical capabilities to continue their duties as trustees. As the primary source of retirement income, you cannot afford to have the money tied up due to lack of trustee capacity to make decisions.

After going through a number of different outcomes with clients over the last 10 years, I think I’ve established some minimum requirements with clients and an ideal strategy, that I am slowly but surely implementing with most.

Now bearing in mind that superannuation will be one of the two largest assets most people will possess from now on, the other normally being the home and that is not very liquid, you need to ensure that your loved ones have access to funds required to take care of you and themselves should something happen to you.

As a minimum if you have individual trustees or a corporate trustee you must have an Enduring Power of Attorney (EPOA) in place so that someone can step into your shoes as trustee or director if you can no longer perform your duties. Why anyone setting up a new fund would not have a Corporate Trustee, is a mystery to me. You just have to google  “Why Self Managed Super Funds should have a Corporate Trustee” to see page after page of the industry’s top legal and financial minds overwhelmingly in favour of the Corporate Option.

Our ideal SMSF succession planning strategy involves:

  • Moving to a corporate trustee now if one is not already in place. Far better to do this while all trustees are of sound mind and body than dealing with it during a time of grief or illness;
  • Putting a EPOA in place for each member with a suitable substitute in case the original cannot perform their duties (overseas, ill or overwhelmed).
  •  Amending the deed to ensure that a EPOA / Executor can step into a member’s place immediately if required;
  • Amending the wills to pass the shares in the Corporate Trustee to the people required to take over while protecting the rights and position of the remaining spouse against a possible grab of power by replacement trustees;
  • Reversionary Pensions and/or Non-Lapsing Binding Death Nominations to ensure funds go to whom the original member intended.

Here is a case study showing why you need to be prepared:

Take Jim & Louise, both leading very healthy lifestyles in their late 60’s and running an SMSF for over 15 years and set up as Individual Trustees when this was the recommended option in the late 90’s. They had not arranged Enduring Powers of Attorney either as they “were going to get around to it later when they needed it”.

Jim was the main driver when it came to running the SMSF. He was diagnosed with Alzheimer’s and rapidly got worse to the point where within 18 months he could no longer manage the running of the fund. So after a family meeting it was decided to have Jim step down as trustee and one of his sons, Paul, volunteer to be trustee in his place. Unfortunately, Jim no longer had the capacity to grant a power of attorney so the family had to seek legal advice and apply for a Financial Management Order from the Guardianship Tribunal in NSW. This took months to process.

Once the financial management order was granted the SMSF trust deed was amended to make Paul a trustee of the fund, they had to change 2 bank accounts, 3 term deposits, 16 share holdings and 5 managed funds in to the name of Louise and Paul. This involved a copy of the deed of amendment, copies of identity documents, off market transfer forms and new account applications which was enough to drive anybody mad. The process took over 6 months to finalise as they had to resubmit much of the paperwork twice to meet different requirements of each investment provider.

All this while, Louise was visiting Jim daily in the nursing home to help with his care and Paul was trying to do his day to day job. It caused much unneeded anxiety for a family coming to grips with the patriarch’s illness.

Had they used a corporate trustee and had an EPOA in place they would have simply resigned Jim as a director and appointed Paul in his place or indeed Louise could have acted for both of them as Sole Director basically in 2 capacities. This might have taken 10 minutes and sending copies of Paul’s ID with his signature to each provider.

Because of this experience Louise has now decided to actually set up a corporate trustee as she realizes this should have been the move earlier but no one guided them. She would prefer to go through all that paperwork now rather than go through it again at a future time when she needs to focus on her own health or family.

In summary you should always plan for contingencies as you never know what’s around the corner and far better to be prepared than put your loved ones through a paperwork nightmare. If you have an SMSF, have you considered succession planning?