When preparing a comprehensive financial plan for clients, professional planners must take into account many things. At the forefront of a plan are the strategic steps a client needs to take to help achieve their financial and personal goals. In addition, a major part of preparing a plan is risk minimisation.
The main areas where the risk of financial harm needs to be minimised relate to investments, cash flow and death. Insurance and diversification are two ways of protecting clients from suffering financial harm in the event of market crashes, sickness, injury, and death.
The consequences of a client dying that must be considered go beyond just financial matters and include income tax and reducing stress on the surviving member of a couple. The requirement to address these consequences is magnified when clients have an SMSF.
It is hard to think that in my early days of advising, when presenting clients with the choice of either acting as individual trustees for an SMSF or forming a company to act as trustee, I concentrated more on the extra cost of forming a company and did not consider how the administration and personal benefits of a company far outweigh any extra cost.
When presenting the alternatives to clients of a company trustee now, which includes a reduction in costs and administration when one of the couple dies, it is not surprising that in virtually every case when an SMSF is formed, clients choose to have a corporate trustee.
Less stress for bereaved partner
The appeal of not having to find a new individual trustee or forming a company to take over as trustee, and the fact that at this time of grief the surviving member of a couple does not need to worry about any administrative actions needing to be taken to keep an SMSF going, far outweighs any extra initial cost of a company trustee.
When discussing one of the two inevitabilities of life, and how death will impact upon their financial and superannuation affairs, the other inevitability of life and its effect on superannuation must also be addressed. This is especially the case when clients have a superannuation account with a high percentage of taxable super benefits.
The potential problem of taxable superannuation passing to non-dependants upon the death of the last member of a superannuation fund will increase if the coalition’s changes to superannuation are passed by both houses of federal parliament.
Whereas previously the ability to use a re-contribution strategy, to effectively transform taxable super into tax-free super, will no longer make sense. This is because not only will there be the $500,000 non-concessional contribution limit; the removal of the work test for people aged 65 and over will mean re-contribution strategies could cause more harm than benefit.
For my older clients I have in recent years been advising that when the first of them dies, an assessment will need to be made of the value of their superannuation, especially when a high proportion is made up of taxable superannuation benefits.
Decision re SMSF funds
The review of the superannuation fund needs to be based on the remaining member’s required annual income, a generous estimate of their life expectancy, and the amount of capital required in the SMSF to fund their required income.
After this assessment has been completed, and it is decided that there is a large surplus of funds in the SMSF, a decision needs to be made on whether to sell the excess investments, have a tax free lump sum paid to the remaining member, and then either gift the proceeds to adult children or purchase a tax effective investment that the client can still control such as an insurance bond.
