When to wind up SMSF

There are probably several people in this or a similar situation - getting old, retired, in good health, adequate assets inside & outside of super, mandated draw-downs, having tax-free access to super but facing the dilemma of when to take the money and run (self-funded retirees with no chance of getting a pension).

Hypothetical question: How do you decide what is the best timing to wind up a SMSF?

Background:

• Single member fund (other member recently deceased)
• Member in reasonable health
• Sound mind
• >80 yrs old
• Doesn't need the money due to any pressing health issues/unexpected expenditure/nursing home bonds
• No dependents living with member
• Long-term planning no longer applies (If the remaining fund member was younger, then there could be a long-term strategy as well.)

Strategy is to avoid having funds trapped in the SMSF at death and having tax taken out when distributed to non-dependent 'adult offspring'.

Do you just take a punt as to how much longer you've got, keep it in a tax-free environment and hope that you can pull it out before you pull up stumps?

Leave it in SMSF and let the trustee worry about winding it up and losing 15% to tax

Or

Withdraw the lot to save a substantial amount of tax later (1-10 years)?

 

That question is a matter requiring licensed advice. There may be merits. There also may not be. The 17% tax shortfall (2 % medicare) applies to a adult beneficiary not the fund trustee and depending what the death nominations are may be imposed directly if the fund pays a death benefit directly or may occur indirectly if the super death benefit flows through the deceased estate. The member statemnets should show the last known taxed element as % of the fund and may be a guide to that potential beneficiary tax issue. Any unrealised gains on assets may also be impacted with a death in fund eg pension cant continue when decaesed so the CGT events are taxable at least in part. Super law requires death benefits "be cashed" which requires assets to be sold down. They cant be transferred to a beneficiary.

 

So if the SMSF has real estate, it needs to be sold? What would the time-limit be?

 

"As soon as possible" after death. The ATO adopt the view that usually 6 months is sufficient but there are exceptions and selling property could be one. Care should be taken that choices to delay sale will pose a concern and may be penalised by the ATO. A beneficiary may have grounds to personally sue the adviser / trustee / executor of the SMSF (s55 SIS Act) where a delay occurs. Seeking legal advice on a inspecie transfer of the asset to one beneficiary is also recommended. If there are other assets in the fund that gets complicated !! A maximum of TWO payments / transfers are permitted. Many deeds may not permit that and may need amendment to correct that defect. [subregulation 6.21(2) SIS Regulations are worth reading]

Where there is a decent unrealised CGT gain on property it may be wise to consider strategies for selling well prior. I recall one client issue where this had been warned. They didnt act. Following death the sale was poorly timed in the market and there was nothing they could do. Then when sold around $35,000 of tax which would otherwise have been $Nil was incurred.

Strategies around exiting super are quite important for ALL super members and especially a SMSF. Some can be improved and others need to be understood.

 

What kind of assets are in the SMSF?

In-specie transfers are a possible option too.

 

Term deposits, very risk adverse.

 

A re-contribution strategy to minimize taxation to non-dependent payouts may help.

 

Not for an >80 year old!

 

Thanks for the (bolded) reminder on that aspect!

As to the other issues, some similarities so while my beneficiaries will inherit the funds via my Will, I am now taking the cash the investments generate in the SMSF and then distributing the funds to my adult children. They are getting an inheritance early I guess.

 

Beneficiaries cant inherit super via a will but if the super flows to their estate it indirectly does that. If the super is subject to a death nomination to the estate then the estate may become entitled. Where is it ? Who might find it ? Reversionary pension could change or frustrate that.

 

I should have clarified that in my case the BDBN nominates my Estate as the beneficiary and my Will has a superannuation death benefits proceeds trust. All done via FPs, lawyers and accountants well versed in the relevant aspects involving these issues.

Copy of BDBN with lawyers along with original of my Will and EPoA. Financial firm has original of BDBN along with certified copies of my Will and EPoA. Certified copies of EPoA and Will handed to both the nominated Attorneys and Executors. Will recently updated too. Old Will shredded.

Certified copy of EPoA and replacement Will in strong box at home (as well as cloud and external hard disks) together with a note stating the location of the BDBN (as above) and the details of the firms to contact along with access codes to cloud and details of information of external hard disks.

Just to add, the Will gifts shares in non-fixed trusts where there is a Corporate Trustee to the Executor who is then required to pass effective control to Primary Beneficiaries.

 

We are Currently winding up SMSF, just guided by my accountant. Should be finalised by March 2021

The SMSF not a good strategy for us, capital will be reinvested