Why SMSFs Should Plan For The Unexpected
Understandably, trustees of new self-managed super funds are typically full of enthusiasm about what can be achieved. It's largely why many would go the self-managed route in the first place.
Yet while investors are extremely enthusiastic about establishing SMSFs, statistics suggest they may be less enthusiastic about closing them down – even if their circumstances significantly change.
The tax office's latest-available SMSF statistical report shows that more than 33,000 self-managed funds were established in 2015-16 with an annual average of about 36,400 established over the past five years. (These statistics are regularly updated by the ATO as more information becomes available.)
By contrast, 4835 SMSFs were reportedly wound-up in 2015-16; a figure that is likely to markedly rise when fully updated. And over the past five financial years, an average of 9400 funds closed annually.
In short, almost 182,000 funds opened over the past five financial years while about 47,000 closed. (The total number of SMSFs had reached 575,000 last September.)
Common triggers for fund trustees to close an SMSF include death or illness of its most-active member, asset values eventually becoming too small for a fund to remain viable, members losing interest and relationship breakdowns. Some members simply reaching very old age no longer want the responsibility of an SMSF.
SMSF advisers may suggest that when clients are considering setting up an SMSF, they should think about what to do should circumstances change, such as the death or illness of a member. And what should be done if a point is reached where a fund no longer meets its members' expectations?
This type of planning may seem counter-intuitive given that funds are usually established with such optimism.
Yet in numerous cases, realistic long-term planning may reduce the possibility that a fund will prematurely close.
Certainly, strategies can be adopted – perhaps with the assistance of an SMSF specialist adviser – intended to improve a faltering SMSF's performance and to provide more professional assistance with its overall management.
And as another possible alternative to closure, some older members may choose, if appropriate given a family's circumstances, to gain help from their suitable adult children in the running of their fund.
Long-term planning for an SMSF's future may include:
- Considering an enduring power of attorney granting authority to another person to make financial decisions on a member's behalf, including if mental capacity is lost.
- Thinking about who will control the SMSF following the death of the most-active member.
- Considering whether to have a corporate trustee of the fund rather than individual trustees. (SMSFs with individual trustees must have at least two trustees. Therefore, a deceased trustee must be replaced for the fund to legally continue as an SMSF. However, an SMSF with a corporate trustee can continue with a single corporate trustee if a trustee director of a two-person fund dies.)
- Thinking about whether to nominate a successor trustee if the fund has individual trustees or a successor director if the fund has a corporate trustee.
- Putting plans in place, if appropriate, for an SMSF to have additional professional administrative and investment assistance in the event of illness or death of a member. Perhaps this would include planning for the stage when members may want less day-to-day involvement with their SMSF.
- Considering whether to simplify a portfolio's investments and asset allocation as members age.
Depending upon the circumstances, a point may be reached sometime in the future where it may best to close an SMSF and rollover the savings into a large, APRA-regulated fund. It is, of course, not in the members' interests to operate an SMSF that is clearly past its use-by-date.
SMSF trustees should plan for the unexpected – as well as the expected and the inevitable.
Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment.