A very common SMSF structure is where a husband and wife start their own fund and run their own affairs, whether this is in accumulation or pension phase. They are the sole members and trustees. But what happens if one of them dies?
In the immediate term, this will depend on whether the SMSF has a corporate trustee or individual trustees. If a corporate trustee is in place the quick answer is very little needs to be done. So most of this blog will look at the situation where husband and wife were individual trustees and sole members.
Section 17 of the Superannuation Industry Supervision Act 1993 (SISA) defines what a SMSF is. As part of this it deals with the trustee requirements where there is a sole member of the fund. If there is no corporate trustee, the member is required to be an individual trustee, but cannot be the sole trustee of the SMSF (there must be 2 trustees). Failure to comply with this rule will mean that the SMSF fails the very definition of what an SMSF is and of course compliance issues ensue.
There is no latitude in this requirement where a new member is added (that is, they must become a trustee immediately or the existing trustees not only have a non-complying fund, but could face time in jail). However, where a member is lost, there is a grace period of up to 6 months to appoint a second trustee before s17 becomes a problem. So in a 2 member fund, upon the death of a member the remaining trustee should look to appoint a new trustee, but there isn't a mad rush to do this. This is just as well, because it is a decision you need to consider carefully. Ideally I think, you would appoint a corporate trustee and become a director of that corporate (and resign as an individual trustee). The reason being that you then don't need to appoint a second person to become involved in your financial affairs.
If you are going to appoint someone else, consider at least the following in making your choice:
- How well do you know them, and how well will you be able to work with them in making decisions about the fund
- How close by are they – distance can become annoying when it comes to signing documents and communicating.
- Are they in a 'stable' situation that is likely to stay that way
- Do they want to be involved in your SMSF decisions.
Its not always easy to find someone who you are comfortable working with on personal matters, is dependable, willing to be involved without any motives of their own, and lives close by. A corporate trustee keeps looking better.
