Incapacity and SMSF trustees: How to get out of running an SMSF when health is poor or just too old?
It’s not just death and ageing that triggers a fund wind up – could be low fund balance or health status of members or divorce etc
When a member dies, they may leave behind a less active or interested partner who hasn’t been as involved in the day to day running of the Fund
The choice of a new fund will require professional advice, as will executing on the SMSF wind up
What’s involved in winding up an SMSF?
Begin as you intend to end. When it comes to SMSF’s, exiting at the right time and in an orderly fashion can often be a difficult decision to make for Trustees and members. However, making a plan, understanding the options before entering into an SMSF, and being flexible to changing circumstances is prudent.
“I often meet clients who are aging and there are obvious signs of diminished capacity, physical decline, failing health and greater confusion (of thoughts). Sometimes clients come to us to get the wind up underway as they may have started to worry about their own capacity to continue running the fund. However, it isn’t just aging that can have consequences for the running of an SMSF.
“As a planner working across the spectrum of peoples’ “Financial Life”, we expect to see an increasing number of younger clients for whom running their SMSF is no longer viable or good for them. It shouldn’t be surprising, after all the average age of SMSF members is on the decline and claims evidence from the insurers on our approved list (and generally across the industry) shows a rising number of claims for mental health, stress and the like; and with so many funds having 2 spousal members, whilst divorce rates were down slightly in 2014, nearly half as many people got divorced as did marry (40%),” said Genene Wilson, Senior Financial Planner, Omniwealth.
“Certainly in discussing with my colleagues, a number of new clients recently have elected to wind up their Fund after receiving advice; some of whom are finding it too difficult or stressful. Let’s be clear, an SMSF is not right for everyone and we take the time with our clients to explain what will be involved in running an SMSF and help them decide if it’s right for them. We also ask our clients to complete an ATO approved course for SMSF Trustees – they are free online.
“I have recently met with one Trustee of a two member Fund where the Fund is no longer viable from an account balance point of view, it’s unlikely that the balance can be boosted in the client’s collective current circumstances, which are:
· one member of the couple is no longer able to substantially contribute to the Fund, stemming from lower income due to mental health problems;
· the couple are taking the first steps towards matrimonial separation;
· one member is no longer able to fulfil Trustee responsibilities themselves despite medical treatment over the past 1-2 years
· the healthy member of the couple holds EPOA for the spouse (member), but is unable/unwilling to act in the circumstances to roll the member out and wind up the Fund due to a concerns about perceptions of not acting in the best interest of that member and future recourse; and there is no alternate EPOA in this case.
“Good advice is crucial at this time involving the Financial Planner, Legal, Accounting and Tax advisers for the client to understand the way forward and handle the transition,” said Ms Wilson.
So, when is the right time to call it quits?
From a financial planning point of view, it often falls to the Planner to start the conversation with the client/members.
“It is my observation over a number of years that such conversations can be difficult, akin to suggesting to an ageing parent it might be time to hand in their driving licence – tread with care and compassion.
“As for divorce, I have seen a number of times the members intend to carry on in the Fund, however when a new partner arrives on the scene things can change, dramatically. Trustees/members need to self-assess whether it is better to quit sooner rather than later, perhaps waiting will dredge up old hurts from the split. Again, a planner can assist in navigating this decision with their clients.
“In the case where a member has died, there may be a situation where the remaining member has not been as actively involved in the day to day running of the Fund, and has neither the skill or confidence to continue in the SMSF. In some cases, such as where the Trustee is a corporate, the shares in the Trustee Company pass to another person who can assist the remaining member. However, this is not always the case, the shares may pass under the Will to the wrong person and it may cause problems for the Funds ongoing operation. A carefully considered Estate Plan is crucial and early planning can help to minimise upset and uncertainty for the remaining member at a time of vulnerability.
“What type of fund a person rolls over to is dependent on their individual circumstances or situation, a Financial Planner can assist to provide advice on the costs and benefits of each type of Fund. Depending on the assets held within the SMSF and the phase (accumulation or pension) a wrap account may be a suitable option, as the wrap account may offer more flexibility than a retail/industry or public offer fund, albeit that those type of funds are now offering greater access to products such as term deposits, direct shares and ETF’s. In some circumstances Trustees may be able to interpose an approved professional Trustee (SAF), again this would be the subject of advice to assess the assets held within the Fund, minimum account balances required by those Trustee companies and costs and benefits of making the change,” stated Ms Wilson.
So, what’s involved in winding up an SMSF?
1. Decide if the fund is to be wound up and the timeframe for doing so.
2. Will assets be cashed out, taken as a lump sum, or rolled over to another Fund.
3. Can assets be transferred in-specie to the member or the new Fund?
4. Assess the costs to wind up the Fund and the tax implications (such as CGT) as those monies will need to be set aside and paid before the Fund is wound up and deactivated.
5. Refer to the fund Trust Deed, to see if there is any requirements to be met in winding up the SMSF.
6. Prepare a checklist of tasks to be actioned in the wind up capturing as many details as possible, as this will make the management of the wind up easier and ensure that it is correctly wound up. Important to ensure that you avoid expensive mistakes such as additional tax returns, preparation of financial statements and audit. The ATO has a useful checklist available.
7. The Trustees/members should formally agree to the wind up/closure of the Fund and if there is a corporate Trustee, Directors should agree if the company is also to be wound up.
8. All fund financial and prior year tax and compliance obligations should be up to date and interim financial statements prepared for the Fund.
9. Members should verify how they want their benefits paid, and the sale or transfer of assets should be arranged.
10. From here, final accounts can be prepared and audit completed, the ATO notified and final expenses and taxes paid. It is prudent to keep the Fund bank account open to receive income previously accounted for, tax refund and the like. Alternatively, cash could be held on Trust to pay any liabilities.
11. The Fund has no assets remaining once it is wound up and the Fund cannot be reactivated.
The reality is most of the above can be carried out by or with the assistance of a Planner, Accountant, or SMSF Administrator. However, the Trustee and member of the Fund should understand the process as not all tasks can be delegated and the SMSF Trustees are ultimately responsible.
