Why you should action SMSF succession planning strategies today

You’ve committed a large part of your working life to building your life savings but managing your finances doesn’t stop when your retirement starts. Planning for the management of your SMSF as you age and the effective distribution of your estate when you pass away is a complex but necessary component of managing your fund and financial wellbeing. A good succession plan can provide certainty and peace of mind for you and your family, and it’s often more practical and less emotional to consider planning and implementing these strategies now rather than waiting until you really need to.

It’s important to review how you’ll manage your SMSF as you get older

From investment to compliance decisions, managing your SMSF takes time and commitment. And as you age, your priorities and those of your co-trustees may change, or one of you may become ill, incapacitated or pass away. Having a good support system in place can help alleviate the stress of managing an SMSF, especially for spouses who may not currently be involved day-to-day. Above all, the priority is to ensure that your SMSF continues to support every member.

There are a number of support systems that may be available for you to consider. Many people choose to add another trustee such as an adult child or close relative who can assist with paperwork and decision-making. However, it’s important to consider their capacity and knowledge, as a relative who has little time or financial expertise may not add much value.

Appointing an enduring power of attorney (POA) may also provide another support system as it allows someone else to make decisions on your behalf. This is a very important consideration for all trustees so be sure to understand the capabilities and availability of your POA. You may also like to establish relationships with accountants, financial advisers, lawyers and investment specialists, but look for an experienced firm who understands the nuances of SMSF management and the challenges facing older trustees.

Choose an SMSF structure that will support you and your family

SMSFs can be formed with an individual trustee structure (comprising up to four single members each appointed co-trustee) or with a corporate trustee structure – essentially a company acting as trustee for your fund with your members acting as directors of this corporate entity. The corporate trustee structure has significant advantages for succession planning – it allows members of the SMSF to be removed or appointed easily, or a single member to run the fund without appointing a co-trustee. When one member of a couple passes away, the corporate trustee structure can alleviate considerable stress and hassle for the surviving spouse at the time. Importantly, individual trustees can change to a corporate trustee structure at any time.

Many SMSF members have specific wishes regarding how their legacy is passed to their intended beneficiaries. They are also concerned with considering the potential tax implications and seeking protection for their beneficiaries, because when inheritances are distributed (irrespective of value) even a seemingly simple family structure can result in stress and anxiety if the wishes of the deceased are not clearly defined. To avoid this, there are a number of practical things to consider and implement now. These include:

1. Consider having a binding death benefit nomination (BDBN) and/or a reversionary pension nomination (RPN) in place

Many people don’t realise their super is not automatically covered by their will. BDBNs and RPNs are separate documents that deal specifically with the distribution of your super member benefits – if a valid BDBN and/or RPN is not in place, it may be the case that the surviving trustee or executor decides on the distribution of your member benefits.

2. Look at effective tax strategies for passing on your super

Most super benefits contain taxable and tax free components. In certain situations, such as leaving super to adult children, death benefits tax may be payable and the amount can be substantial. It’s important to understand the potential tax implications of your decisions and consider your options. 

3. Consider implementing a testamentary trust in your will

Testamentary trusts are created within a will and can allow a level of discretion regarding the distribution of income and capital, which may lead to better tax outcomes, especially if your intended beneficiary is a high income earner. Assets held inside a testamentary trust are not legally owned by your beneficiary as they are held inside a separate structure providing some protection in the event of a relationship breakdown or bankruptcy. They can also be used to hold assets in trust for beneficiaries not capable of managing their own money, such as those with disabilities, spendthrift tendencies, vulnerabilities, or who are below an age that you deem appropriate to manage their inheritance.

Implement succession strategies now to ensure your loved ones will benefit

Succession planning is a very personal, sensitive and complex area to navigate. It is vital to ensuring your life savings are well managed as you age and that your super passes to your intended beneficiaries in a tax-effective manner. It can also protect them in the event of divorce, bankruptcy or undue waste. A good estate planning lawyer, who understands how SMSFs operate, can be invaluable in helping you prepare.

This insight does not constitute legal advice. It contains general financial advice and was prepared without taking into account your objectives, financial situation or needs. Any forward looking statements in this insight are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct. As always, your personal circumstances are critical when considering any financial strategy and seeking professional personal advice is highly recommended.

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David Calvert

Managing Director, Family Wealth Management

David Calvert delivers his significant expertise in self managed super funds (SMSFs), retirement and investment strategies to Dixon Advisory’s clients as Managing Director, Family Wealth Management.

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