According to the statistics recently published by the Australian Taxation Office (ATO), 69% of SMSFs in Australia consist of two members. I am often asked by people in two-member SMSFs what happens if one member dies or if the main decision-maker is diagnosed with a terminal illness or suffers a major health problem.
SMSF structure: Under the superannuation law, if an SMSF is established with two individual trustees and one dies, it becomes a single-member SMSF. The rule for a single-member SMSF is that if it is established under an individual trustees’ structure, then it must have two individuals acting as trustees. If it is established under a corporate trustee structure, it does not matter that the surviving member continues to act as the sole director of the company acting as the corporate trustee.
So, if one of the members dies, in order for the superannuation fund to continue as an SMSF, the surviving member will need to consider either appointing someone else to act as the second individual trustee or restructure the SMSF from an individual trustees’ structure to a corporate trustee structure.
If the member who acts as the main decision-maker is no longer able to perform trustee duties for their SMSF, then this person will need to step down as a trustee after appointing the other member, a family member or a friend, to be their legal personal representative and act as trustee. This can be achieved by giving them an enduring power of attorney. Another option is to consider winding up the SMSF by rolling its money into a public superannuation fund.
Assets of the SMSF: Under superannuation law, the only situation where an SMSF must pay out a superannuation benefit is when an SMSF member dies. The death benefit must be paid out as soon as practicable after the death. Unfortunately, the term ‘as soon as practicable’ is not defined in the legislation and the ATO has not published any guidelines. In my opinion, if the death benefit is paid promptly following the member’s death, say within 6 months after liquidating assets, it would probably be acceptable to the ATO. If there are reasonable delays that can be explained, the ATO may accept the actions of the surviving member.
What happens if the SMSF has the majority of its assets in properties or assets that cannot be liquidated easily? The SMSF could consider making an in-specie payment, where an asset is transferred to the member in lieu of paying a cash benefit. An in-specie payment cannot be made where the payment relates to benefits under financial hardship grounds, compassionate grounds or a departing superannuation payment made to a non-resident member.
Winding up the SMSF: There are a number of things that must be considered before winding up an SMSF which includes rolling super entitlements of members to a public super fund. Some super funds will allow assets such as listed shares to be transferred to them whereas others will only allow cash – which means you would need to sell the assets of the SMSF and then rollover the cash proceeds. Of course by selling assets in your SMSF, if your SMSF is in an accumulation phase, it will trigger capital gains tax payable on the sale of the assets. If your SMSF is in a pension phase then it will not have to pay capital gains tax on any sale of assets supporting the pension.
Changing assets in an SMSF: If assets in an SMSF need to be changed to simplify the management of the SMSF, due to the death or incapacity of the main decision maker, then you must ensure that any new assets added to the SMSF are in line with the SMSF’s existing investment strategy. If not, you should consider updating the investment strategy.
Do not be alarmed if you are left managing your SMSF on your own. There are SMSF professionals like myself who can assist with your decisions.
Monica Rule is an SMSF adviser and author of the book “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”. Monica is presenting “SMSF Success Secrets – securing your financial independence” in Sydney on 7 November 2014, where bot Noel Whittaker and Graham Hand will also be presenting. See www.monicarule.com.au for more details.