SMSFs: Looking To The Future – Realistically

Understandably, trustees of new self-managed super funds are typically full of optimism about what can be achieved. It’s human nature. Yet while investors are extremely enthusiastic about establishing self-managed super funds, statistics suggest they are less enthusiastic about closing them down even if their circumstances change.

The tax office’s Self-managed super fund statistical report – December 2014 shows that 32,786 SMSFs were established in the 12 months to December 2014 with just 6,246 being closed.

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 between members. Of course, some members reaching very old age no longer want the responsibility of an SMSF.

Professional advisers frequently suggest that clients make plans when establishing an SMSF about what do if their circumstances change, such as death or illness, or if the fund does not perform to expectations.

In many cases, careful, long-term planning may remove the necessity to close a fund if things change. In other cases, 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.

The ageing of a large proportion of the population, as outlined in the 2015 Intergenerational Report, highlights once again why SMSF should plan for the possibility that a member may die or suffer a severe illness. A significant increase in dementia sufferers is expected as the population ages.

As Smart Investing recently discussed, SMSFs hold more than half of the overall superannuation assets invested in retirement products. And more than 40 per cent of SMSF members are over 60.

In a recent address to a Taxation Institute conference, Matthew Bambrick, assistant tax commissioner for self-managed super, said SMSF trustees and their advisers should be "planning for the unexpected".

Bambrick believes that many SMSF trustees do not plan for the possibility that death or severe illness of a trustee may lead to their funds becoming ineffectively managed – unless action is taken.

"Many SMSFs typically have two members with one member taking a more active role," Bambrick says. If the most-active member were to die or become incapacitated, the remaining member may have little superannuation and investment knowledge – or interest – to adequately look after the fund.

"A poorly-managed fund can result in lost income and an erosion of lifestyle," Bambrick warns. "This can be caused not only by bad investment choices but through non-compliance with super and tax laws."

When an SMSF is properly "planning for the unexpected", there are many points to discuss, if appropriate, with skilled professional advisers. This planning 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.
• Planning who will control the SMSF following an active trustee’s death.
• 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 directors 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 the members age.

As SMSF members grow older, their demand and need for skilful professional advice will inevitably increase. Welcome to the future.

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.