SMSF conversations to have before you die
Created On: 15/03/2022
If you run your family’s DIY fund, it’s time to get your spouse more involved. This is how to do it.
In recent decades, the average number of members in a self-managed super fund has held remarkably consistent at two members. So the sudden death or incapacity of a member can throw well-laid SMSF plans into chaos. Rather than focusing on the rules after you die , let’s examine what to do before you die.
It’s fairly common that one partner is more active in managing the SMSF. Smart couples deliberately play to each other’s strengths and weaknesses.
Next let’s look at what you’d want to happen if the more active partner in the SMSF had an accident.
If he or she was incapacitated, they would want an enduring power of attorney. They may not be able to make important SMSF decisions, but someone they trust can.
If they did not survive, you would want nominations (binding or non-binding) in place for death benefits and reversionary pension documents for pensions. If there were any lingering tax or compliance issues, you’d want them all resolved. This is basic SMSF estate planning stuff.
But beyond legal documents, have you considered how your spouse would manage the SMSF? In an ideal world, they’d take over your role and seamlessly continue your strategies.
Unfortunately, we don’t live in an ideal world and in my experience that just doesn’t happen.
Consider their psychological state after your death. In deep grief with their life thrown into disarray, decision-making becomes incredibly difficult. A short attention span, poor memory and a lack of attention to detail are common. If they consider their finances, it’s mainly to freak out about them.
The most important thing you can do is to buy them precious time. Tell them to be wary of anyone in the first six months (family members or third parties) who tries to rush them into major financial decisions.
Structure your SMSF so it can run for six months without changing anything. The easiest way to buy the surviving partner time is having plenty of cash available. Cash and cash flow are crucial – paying bills and maintaining their lifestyle is what they freak out about; they are unlikely to worry about whether the SMSF beats the market.
They want to confidently answer the question” “Will I be financially OK?” So help them understand these things before something happens to you. Have an easy-to-follow schedule of family expenses (easy for them to follow, not you!) and try to educate and involve them in SMSF decisions.
Ask your spouse to manage discrete parts of your SMSF; such as cash flow and paying fund expenses. Ask them to chair the next meeting with your adviser so the discussion is through them, not over them.
Encourage them to do free online programs to learn more about your SMSF. As a chartered accountant, I recommend the free joint CA/CPA program at smsftrustee.com
You may employ a trusted adviser to help your spouse bridge this confidence, knowledge and trust gap if something happens to you. But even this can fail. Many grieving spouses change adviser after their spouse dies. They perceive the prior adviser didn’t understand them; only paid attention to you (the active client); or pushed them into decisions. They perhaps felt ignored but never said anything.
So ensure your adviser takes the time to explain things to both of you. If the remaining spouse is a woman, they may feel more comfortable with a female adviser.
Often the remaining spouse suffers from “financial analysis paralysis”. They may associate everything about the SMSF with their departed spouse and changing anything fills them with doubt and guilt.
Start honest and open conversations today. If your SMSF is complex with illiquid assets, your spouse may not even want to retain the SMSF. Let them know they should change things as time passes and they regain confidence. The SMSF should reflect their wishes, risk tolerance and investment approach after you have gone, not yours.
If we knew the day we were going to die, it would make SMSF estate planning far easier; but we don’t. So start honest discussions today so your spouse knows they will be financially OK and can eventually independently manage your family’s wealth with confidence.