The increased popularity of self-managed super funds has been mainly attributed to the control that the member trustees have over their funds in retirement. Unfortunately for some members who decided not to use a company to act as trustee for their SMSF, this choice could cause undue concern when one of them dies.
When an SMSF is established there is a choice between having the members act as individual trustees or to appoint a company, with them being the shareholders and directors.
The decision was often made for the individuals to act as trustees to save money. The extra cost of having a company is about $800, but this price can change depending on who is used to set it up. There is also an annual lodgment fee of $42 a year.
Where individuals act as trustees, and one of them dies, the remaining member has a choice of the following:
Wind up the fund and pay out all of the benefits or roll them into an industry or commercial fund.
Choose to become a small APRA fund and pay for a trustee company to take over as trustee.
Find another person to become a trustee to replace the deceased.
Appoint a company to take over as trustee.
Converting an SMSF to a small APRA fund can be difficult, depending on the investments held by the SMSF.
In addition, as small APRA funds have a commercial trustee company acting as trustee for the fund, the administration costs for the SMSF increases dramatically.
Finding an individual to act as trustee, such as a son or daughter, can create other problems. This is because the other trustee must be available to sign all administration and investment documentation.
After the new trustee has been appointed, the name that all of the investments are held in has to be changed.
When an SMSF is set up with a company acting as trustee from the start, nothing needs to happen. This is because under the superannuation regulations the only time you can have a single-member trustee of a SMSF is when the trustee is a company and the member is a director of the trustee company.
When one of the member trustees dies, this leaves the company with one member director.
If you have set up your SMSF with individual trustees, it can be worth the initial cost and administrative burden to have a company take over as trustee now.
This will mean that the cost and administrative burden when a member dies is avoided at a time when this is the last thing that the surviving member wants to think about.
In addition to the benefits of having a company when a member dies, having a company act as trustee from the start be an advantage for these reasons:
When there is only one member. If a company is not used, another person must be found to be a trustee. This means whenever super fund documentation needs to be signed, the other non-active member must be available.
Having a company act as trustee makes it easier to differentiate between personally held investments and superannuation investments. In addition, having a company with a short name makes it easier when filling out applications and other documentation when buying investments.
If you are thinking about having a SMSF, you should give careful consideration to having a company act as trustee. If you have individual trustees now, you should carefully consider appointing a company to replace you.