When a family member has to step in
There are a number of situations where a SMSF member or member’s children may be required to step in to manage the fund. If not correctly planned for, this can be a lengthy and costly process. This article outlines how SMSF members can avoid this process and best practices in doing so.
There are a number of situations in which a self-managed super fund (SMSF) member or members’ children may be required to become involved in the management of the fund.
There are many considerations for the family in this case. Here, we explore what some of them are.
There are many reasons why an SMSF member or members’ children may be required to take an interest, or even total control, of an SMSF at some stage. AMP financial planner Mark Borg explains.
“Typically, ill health is the reason why the children need to become involved in the running of the fund,” says Borg.
This may be due to a sudden event such as a stroke, or it may take place over a period of time where the fund members suffer a mental disorder such as dementia.
“But as many people grow older, they can lack the interest and inclination to run the fund as well, requiring the kids to get involved. Older people can become less mobile and as a consequence may not be able to meet with professionals to assist in this area,” he says.
There are prescribed steps family members have to take in the event they are required to suddenly take an interest in, or control of, another family member’s or members’ SMSF.
“The next of kin would have to make an application to the relevant government body in their state to obtain a financial management order to deal with the assets,” says Borg.
Across Australia the relevant bodies are:
- NSW Civil and Administration Tribunal
- Victoria Civil and Administrative Tribunal
- Queensland Civil and Administrative Tribunal
- Western Australia State Administrative Tribunal
- South Australian Civil and Administrative Tribunal
- Tasmania Department of Justice
- NT Civil and Administrative Tribunal
However, Borg says making a financial management application can often be a lengthy process.
“It usually takes more than six months – the SIS Act gives the fund a six-month grace period to ensure it remains compliant if a sudden event such as a member’s total incapacitation takes place, throwing the fund’s affairs into disarray,” he advises.
The Superannuation Industry (Supervision) Act 1993 sets out the laws that administer Australia’s super system.
The process for other family members to take control of a relative’s SMSF can also be costly.
“In my experience this can be a lengthy and expensive process, at a time when the family is under stress due to a serious change in a parent’s medical condition. The SIS Act’s requirements also add a sense of urgency,” says Borg.
“This is a situation that could have easily been avoided by careful planning and foresight much earlier,” he adds.
The best way to avoid this state of affairs is to have an enduring power of attorney in place.
An enduring power of attorney is an agreement that appoints a trusted person or people to make financial decisions on someone else’s behalf.
When you are choosing an enduring power of attorney you should be mindful of how available they are to manage your affairs. For instance, it is often not advisable to choose someone who travels frequently or has no knowledge of your financial affairs, says Borg. It's also important to ensure the person that you nominate is in fact eligble to act as your power of attorney.
“Above all, it must be someone you really can trust to act in your best interests,” he adds.
It is often a good idea to have written instructions to your enduring power of attorney. These notes should set out how you want the SMSF and your other assets handled. Make sure to run through the document with your enduring power of attorney, so you have confidence they understand your wishes.
“Remember, this person is the trustee of your superannuation fund. So, it also makes sense to ensure you have reversionary pensions or non-lapsing binding death benefit nominations,” says Borg.
When you’re appointing someone to be your enduring power of attorney it’s also a good idea to review other aspects of your estate planning
This includes reviewing your wills. When you do this, ensure you address the way in which you wish the assets in your superannuation fund to be handled in the event you are not able to look after your own financial affairs.
It’s important to ensure you have thought through how you want your SMSF handled in any situation, to ensure its smooth administration under all circumstances.