SMSF and Relationship Break-up – Planning for the Future
The typical SMSF in Australia has two members, often a couple. Divorce or relationship break-up can cause difficulties in dealing with the SMSF.
When a couple separates their assets are divided, based either on their own agreement or a court decision. This can include their superannuation assets. The recent amendments to superannuation legislation, which permit borrowing by SMSFs, have made dividing or re-arranging SMSF assets more complex than ever.
The example below shows the various options that may be available for a couple with a SMSF.
EXAMPLE – SMSF and relationship break-up
Anne and Bob are the sole members and trustees of a SMSF. The SMSF owns a property which is leased at market rates. The property is valued at $500,000. It was purchased using cash and a limited recourse bank loan, the current balance of which is $250,000. The SMSF also holds other assets worth $150,000. Net superannuation assets are $400,000, with Anne and Bob both having member balances of $200,000.
The family home is worth $750,000 and Anne and Bob own it outright. They also hold other assets worth $250,000. Net assets, excluding superannuation, are $1 million.
Anne and Bob agree it is fair that they should each receive 50% of their assets.
- In relation to the SMSF, Anne and Bob could continue as members and trustees with separate accounts within the fund. This could be difficult as it requires a good working relationship between the former couple, which is likely to be lacking.
- The SMSF could sell the property and pay out the loan. One or both of Anne and Bob could then remove their superannuation from the SMSF. This would not be ideal if it is a bad time to sell or if Anne or Bob strongly wishes to hold onto the property.
- A new, third-party member could join the SMSF and contribute sufficient to pay out Anne or Bob’s member balance without requiring the sale of the property. It may be difficult to find a third party who wanted to join the SMSF and provide sufficient funds.
- One of Anne or Bob may be able to make non-concessional contributions to the fund to enable it to pay out the other’s balance. This would have tax effects.
Determining the best way to split the assets of a couple is a complex task that needs to take into account the wants and needs of the former couple as well as tax and superannuation laws. It is important to get professional advice to ensure the best possible result.
Remembering SMSF’s in Estate Planning
SMSFs are too often ignored in relation to the later stages of estate planning. A lot of planning usually goes into setting up and running a SMSF and not enough thought and planning into when and how a SMSF should be wound up or how it should be managed on the incapacity or death of one or more members.
Australia has an aging population and many SMSF members are of retirement age. With the aging process comes increased risk – of ill health, diminished capacity and death. Many people do not have a plan for this time. Without careful planning, there are a number of issues and difficulties that may arise.
For example, if the SMSF has a corporate trustee with the members as directors of the trustee company, loss of capacity by a member may disqualify them as a director. This is undesirable as the superannuation laws require that each member (or their legal personal representative) is a director of a corporate trustee. If this law is breached for more than 6 months, the SMSF may lose its status as a qualifying fund, and large financial penalties may be incurred.
If the SMSF has the members acting as individual trustees, diminished capacity of one member will require the other to assume responsibility for managing and restructuring the fund. This could be very stressful and could also have financial ill-effects. A poorly managed fund can result in lost income and an erosion of lifestyle.
The management of the SMSF in the case of death of one or all members of a SMSF should also be considered.
Primary considerations in relation to your SMSF when planning for the later stages of life are:
- Consideration of whether a retail or industry fund may be more appropriate at a particular age or life stage – this eliminates the complexity and stress of managing a SMSF as you age;
- Whether to have a corporate trustee of the SMSF – this simplifies the changes that need to be made due to incapacity or death or a member;
- The constitution of a trustee company – this should be reviewed to ensure it is in accordance with the other element of your SMSF plan;
- Enduring Power of Attorney – in the event of incapacity the attorney can take over as a trustee or director of the corporate trustee. This prevents the SMSF from breaching the rules about members being required to act as trustees;
- Wills – the Trustees and Executors of your Will often take a role in managing your SMSF after your death, and should be chosen with that in mind;
- Binding Death Benefit Nominations – these can set out who should receive your superannuation in the event of your death.
It is important that members of an SMSF have a clearly thought out and documented plan for the twilight years of their members. Comprehensive professional advice can ensure you formulate a plan suitable for your personal situation and that your plan is properly documented.
Want to know what SMSF could do for you? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.