Separating but staying together – what to consider if you remain in the same SMSF
In recent years I have noticed a growing trend in couples wishing to remain in the same self-managed superannuation fund (“SMSF”) as part of their family law settlement.
At first glance, it makes little sense but in order to determine whether it may be right for you, it is helpful to consider what might be fuelling the appeal.
Resoundingly the main reason for a party wishing to stay in the same SMSF as their soon to be ex-spouse after separation boils down to one simple fact – a winning return on investment. The more money you have to invest, the greater your buying power both to attract the best rate of return on your investment and to negotiate the lowest management fees ultimately resulting in a superior yield.
Anecdotally other factors repeatedly feature in this growing desire:
- In the case of a “sleeper” spouse, complete faith in the ex-stemming predominantly from the financial performances of the SMSF over recent years or, in the case of the more active member spouse, a continuing willingness to continue in this role. Surprisingly, the breakdown of a personal relationship does not automatically sever the specialisation of labour roles that can ordinarily become entrenched in long term relationships;
- A lack of a viable alternative. Being part of an SMSF is sometimes worn as a badge of honour. A spouse may not want to surrender that title and move to a retail or industry-based superannuation fund with management fees linked to the superannuation amount nor may they want to be solely responsible for managing their own independent and newly established SMSF but staying in the same fund and sharing the management fee not linked to the superannuation amount. A new SMSF may not make emotional or financial sense; and
- A level of complexity involves the underlying assets. A SMSF that is heavily invested in say commercial premises from which one of the spouses operates their business may prove more difficult to unravel.
Are these reasons sufficient in the context of a separation? Let’s look more closely at each one.
Undeniably the larger the investment (which staying in one SMSF can ensure) the greater the likely return. However, consider what even superior returns may be achievable by joining in with one of the larger retail funds. In the past decade, many of those funds have experienced returns into the double digits and on closer inspection may give your SMSF (no matter how so configured) a run for its money. However, retail and industry funds have management fees linked to the superannuation amount whereas SMSF has a fixed rate, not linked to the superannuation amount.
A ”sleeper spouse” who judges his or her ex’s performance to manage the SMSF over the past 10 or 20 years and attributes all of its success to that person’s financial acumen would be naïve given the financial landscape which we have recently enjoyed and the historically upward trend in our wealth overall. The true test of a funds ability to perform is possibly better judged in times of uncertainty and downturn. Be cautious in blindly believing that the golden goose will continue to lay golden eggs. The flip side of this for the more active soon to be ex-spouse/trustee of the SMSF is the need to consider how viable it is to “carry the load” into the future. How will this dynamic or imbalance play out in the case of repartnering? The primary purpose of superannuation is to provide for you financially in retirement. This is a long term objective. It is important to recognise that it is therefore deserving of long term planning.
Importantly there is no special honour in being a member in (and trustee of) a SMSF. Those that properly understand the responsibilities that come with discharging trustee duties are often more open-minded about alternatives. Talk to your lawyer, accountant and financial adviser who may be able to assist you to consider all the pros and cons of viable (and often less onerous) alternatives.
If after reading this you feel comfortable continuing in the same SMSF with your soon to be ex, then the following are important take-home points for separating couples:
- Make an appointment with your lawyer for legal advice or accountant to discuss and take steps to rectify any non-compliance issues;
- Ensure your annual audit is up to date and you have up to date valuations for any underlying asset held by the self-managed super fund as the ATO now relies on the market value on an annual basis;
- Organise specialist superannuation advice in relation to the operative Trust Deed. Inform yourself properly on how the fund operates and what obligations fall on you. Also, consider what is likely to occur in the case of a deadlock in the future management of the fund;
- Determine whether the Trust Deed is current or needs updating. Some excellent service providers offer a routine review of the Trust Deed at an ongoing modest cost;
- Think about and seek advice in relation to the investment strategy of the fund that best suits your now likely differing goals and in so doing reflect on your risk tolerance and investment objectives. Are you wanting the fund to invest in conservation or growth assets for example?
- Lastly, please ensure you are completely cognisant of an exit strategy. What are the prerequisites? How can it be executed? What are the costs and who do you need around you to ensure its success? How liquid are the investments?
Beyond all of this, if you have been the “sleeper’s spouse” in this relationship, it is now time to wake up and rise to the occasion and in the case where you have been the one in the driver’s seat, you may have to adjust to sharing that space. In the context of separation, these consequences can be overlooked and need careful consideration for each member spouse of a SMSF.
About the Author
Lisa Wagner is Principal and Managing Director of Doolan Wagner Family Lawyers. Lisa is an Accredited Family Law specialist and a nationally registered Family Dispute Resolution Practitioner. Lisa has close to 30 years of experience as a specialist family lawyer, experienced litigator and skilful negotiator in all family law matters.
Connect with Lisa on LinkedIn: linkedin.com/in/lisawagnerdwfl
These articles are only intended as an overview or comment on current issues that may interest you and are not legal advice. If there are any matters that you would like us to advise you on, then please contact us on (02) 9437 0010.