Self-managed superannuation funds (SMSF) have a lot of complexities that are often overlooked when established.
One such area that is virtually never considered upfront is, what happens to the SMSF in the event of divorce?
For most SMSFs, the husband and wife are both members of the fund. The trustees are usually either the husband and wife, or a corporate trustee with husband and wife as the directors. The end result of this is that, in order to operate the SMSF, both husband and wife are required to authorise all actions of the fund.
This can make operation of the SMSF difficult in the event of divorce. Even more so if the divorcing couple is not co-operating with each other, which is natural in a highly emotive time.
It is unlikely that, in the event of divorce, the former partners would like to remain in the SMSF together. The usual course of events is to wind up the SMSF and for each member to make arrangements for their own superannuation. Both parties are required to agree to this course of action and, in most cases, they are usually in agreeance to wind up the fund. The mechanics in doing so can, unfortunately, cause problems.
The fund will own assets and, in all likelihood, insurances so, in order to wind up the fund, these need to be addressed. This is more complicated if the SMSF has pooled assets (as opposed to segregated assets).
If the SMSF pools assets, it means that the fund itself owns the assets, not any one member. This is necessary if the fund holds single large assets such a property. As no member owns any particular assets, the trustees (i.e. the divorcing couple) must agree on how these assets will be treated.
Both members may wish to retain a particular asset in their own super fund post split, or one member might like to sell an asset the other would like to retain. If the couple would like financial advice in relation to the fund, the financial advisor must provide advice to the individual as well as the trustees of the fund on the impact of the advice. That would require both partners having to agree to advice in relation to each other individually.
The insurance can be even more complicated. Given that it is compulsory to have an insurance strategy for an SMSF, it is typical for the SMSF to own insurance on the lives of the members. In the event that the SMSF is wound up, it can obviously no longer hold the insurance. In this scenario we hope they we are able to transfer the ownership and retain the cover. This is not always possible; depending on the cover, it may be necessary to cancel the insurance and replace it.
There are two situations where this is problematic; if the client won’t be able to be underwritten at standard rates due to a change in their medical history or, if they have level premium cover which has locked in a premium at a younger age.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.