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Succession planning for your SMSF

A mandatory component of managing a self-managed super fund (SMSF) is planning out what will happen to the fund if its trustee were to pass away. While succession planning may not be one of the first responsibilities that comes to mind when managing an SMSF, it is a necessity that can provide certainty and peace of mind for a deceased trustee’s family.

Succession planning can become complex if little or no attention is paid to it on an ongoing basis, but there are ways trustees can ensure the best outcome for both the fund and their family.

One option for a sole member fund is to appoint another trustee. Note that the non-member trustee cannot be the employer of the member unless they are related. This would not be an option for a fund with two members as the available exemptions only apply to single member funds. Those who appoint a family member or close friend must consider first whether they are suitable for a role; running an SMSF requires expertise and knowledge, and appointing someone with limited experience may not be in the best interest of the fund’s future.

Some SMSF trustees may also choose to appoint an enduring power of attorney. An enduring power of attorney is someone who makes decisions on the trustee’s behalf if they become incapacitated or pass away. Common power of attorneys include accountants, financial advisors and lawyers; people who understand SMSF management and the associated challenges. For an enduring power of attorney nominee to be appointed, legal documents, i.e. the succession documents appointing the replacement director, must be in place before the member loses their capacity to be a member.

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Self-managed super funds (SMSF) aren’t just about financial investment

December 3, 2020

Individuals may be looking to opt for an SMSF because these provide entire control over where the money is invested. While this sounds enticing, the downside is that they involve a lot more time and effort as all investment is managed by the members/trustees.

Firstly, SMSFs require a lot of on-going investment of time:

Data shows that SMSF trustees spend an average of 8 hours per month managing their SMSFs. This adds up to more than 100 hours per year and demonstrates that compared to other superannuation methods, is a lot more time occupying.

Secondly, there are set-up and maintenance costs of SMSFs such as tax advice, financial advice, legal advice and hiring an accredited auditor. These costs are difficult to avoid if you want the best out of your SMSF. A statistical review has shown that on average, the operating cost of an SMSF is $6,152. This data is inclusive of deductible and non-deductible expenses such as auditor fee, management and administration expenses etc., but not inclusive of costs such as investment and insurance expenses.

Thirdly, investing in SMSF requires financial and legal knowledge and skill. Trustees should understand the investment market so that they can build and manage a diversified portfolio. Further, when creating an investment strategy, it is important to assess the risk and plan ahead for retirement, which can be difficult if one is not equipped with the necessary knowledge. In terms of legal knowledge, complying with tax, super and other relevant regulations requires a basic level of understanding at the very least. Finally, insurance for fund members also needs to be organised which can be difficult without additional knowledge.
Although SMSFs have the advantage of autonomy when it comes to investing, this comes at a price. Members/trustees need to invest time and money into managing the fund and on top of this, are required to have some financial and legal knowledge to successfully manage the fund.