Debt recycling into super?

Yes I was indeed referring to the obligation fo the bank

 

Most lenders have policies which require the bank be advised within X days of the death of any member where a SMSF loan exists. Lender can opt out and call for full repayment. I have seen two and both had to repay as they couldnt extend a new loan. (Main income earner and main balance beneficicary in each case). As Terry said above the need to "cash" a death benefit can pose a concern for the bank or even the strategy of a loan itself. State laws may also limit ability to use a LRBF and bring in new members. In NSW the assets under LRBF cannot be applied to new members and requires costly amendments to deeds etc. Refinance where there are different members may not be compliant too. Definitely a area for specialist legal advice. DBA Lawyers are one of the best.

Its one (of many) issues people need to be aware of when using LRBFs in a SMSF. Death benefit pensions can be a strategy for members aged 60+ to avoid capital depletion in the fund. Another strategy is holding other death benefits / insurance OUTSIDE the SMSF but this can be limited by non-concessional caps etc.

Death benefits must be cashed...Not inspecie ! SIS Reg 6.21 and the timing says as soon as practicable. The general view is within 6 months but in more complex cases eg a LRBF this may be a year or two. LRBFs with low LVRs and where the other assets of the fund are limited are most at risk but winding up may be more effective.

 

So if no individual/personal guarantee was provided then I suppose I need to look and read the actual contracts. Thanks Terry!

 

If the SMSF trustee borrowed from St G a few years ago there may not be any personal guarantees.

But the death benefits would still need to be paid out - which could be via pension in some cases, and death may mean the loan needs to be refinanced.

 

Yes agree, it was with St George quite few years ago with offsets. LRBAs are with us on lending to SMSF from CBA loans.
I emailed and awaiting reply but had many pages, 'books' of estate planning plus the very specialists lawyer did all paperwork for SMSF guru so I think we are well covered.
It is just beyond me all those rules and regulations, but I suppose it is great to have choices.

 

@Terry_w @Paul@PFI I remember reading about this strategy where SMSF pays for premiums from its reserve and insures the member's life. So if a member dies, the payout goes to the reserve and can be used to pay off debts and slowly release the funds.

EDIT: Found the link, it was SMSF Coach - Insurance | The SMSF Coach See the section "Funding benefits from reserve"

 

Would that still apply after last year's government SMSF changes?
The link below implies consequences:
ATO releases view on use of reserves in an SMSF
I know they removed anti-detriment reserve, unsure what others but not all, as we hold the funeral reserve.
Well, I have been invited to Grant Abbotts SMSF seminar perhaps I should go and ask him?
Anyway great idea, thank you, can ask my lawyer or SMSF strategist too.....

 

Gee you are right, I just looked briefly at my trust deeds, mind you there are 100 pages of legal jargon, but I have found a whole section on Reserves and specific laws in forming one...so I will investigate further, thank you!

XX.X The Trustee may enter into any contract of insurance to establish a Self-Insurance Reserve Account in respect to risks associated with liquidity and/or cash flow which may be compromised as a consequence of a call on the payment of a Member’s Superannuation Interests on the death, Temporary Incapacity, and/or Total and Permanent Incapacity of any one or more Members of the Fund, provided the Self Insurance Reserve Account is compliant with the Superannuation Laws.

YY.Y The Trustee has absolute discretion to deal with the policies and/or contracts for any matter referred to in the preceding terms of Rule 21, including but not limited to termination, variation, assignment, sale, surrender, enforcement and/or renewal thereof.

Insurance premiums may be deducted from Earnings of the Fund, or any one or more Member
Superannuation Interests and/or Reserve Accounts, provided any Insurance Proceeds received
in respect to the polices to which the premiums apply are dealt with in accordance with the
Superannuation Laws.

 

I don't think this works any more, but I could be wrong. This is something you will need financial advice on.

 

The practices of the past using reserves has come under greater scrutiny since the July 2017 and the $500K and $1.6m cap as well as how allocations from reserves count to caps etc. The death benefit strategy doesnt comply with SIS regs requiring fair and reasonable allocations to all members and would count to caps. The ATO issued SMSFRB 2018/1, in relation to the use of reserves by SMSFs which acts as a warning bulletin more that a ruling which gives guidance.

Death benefits in a reserve now may fall foul of the ATO views which set aside from the (deceased) member to circumvent caps and which are not paid out etc.

I would want a current ATO SMSF Ruling for that proposed strategy

 

This highlights a danger of an extensive trust deed which parrots rules. When laws change the deed may be inconsistent and provide poor guidance. The clause giving the trustee absolute discretion with creation and use of reserves doesnt mean that it is compliant or consistent with current law.

Most matters of law permit a trustee to breach laws. A deed cannot protect a trustee from a breach merely as it was permissive. Tax, super and other laws prevail.

 

I agree, but there are SIS act numbers which I did not imbed hence I assume them to be compliant. In addition I do realise to update the Deeds, if needed, each time laws change. A lot of people may not realise that though.....