06
February
2020

Self-managed Superannuation Funds and Divorce

Self-managed Superannuation Funds and Divorce

Self-managed superannuation funds (SMSF) have a lot of complexities that are often overlooked when established. One such area that is virtually never considered upfront is, what happens to the SMSF in the event of divorce?

For most SMSFs, the husband and wife are both members of the fund. The trustees are usually either the husband and wife, or a corporate trustee with husband and wife as the directors. The end result of this is that, in order to operate the SMSF, both husband and wife are required to authorise all actions of the fund.

This can make operation of the SMSF difficult in the event of divorce. Even more so if the divorcing couple is not co-operating with each other, which is natural in a highly emotive time.

It is unlikely that, in the event of divorce, the former partners would like to remain in the SMSF together. The usual course of events is to wind up the SMSF and for each member to make arrangements for their own superannuation. Both parties are required to agree to this course of action and, in most cases, they are usually in agreeance to wind up the fund. The mechanics in doing so can, unfortunately, cause problems.

The fund will own assets and, in all likelihood, insurances so, in order to wind up the fund, these need to be addressed. This is more complicated if the SMSF has pooled assets (as opposed to segregated assets).  If the SMSF pools assets, it means that the fund itself owns the assets, not any one member. This is necessary if the fund holds single large assets such a property. As no member owns any particular assets, the trustees (i.e. the divorcing couple) must agree on how these assets will be treated.

Both members may wish to retain a particular asset in their own superfund post split, or one member might like to sell an asset the other would like to retain. If the couple would like financial advice in relation to the fund, the financial advisor must provide advice to the individual as well as the trustees of the fund on the impact of the advice. That would require both partners having to agree to advice in relation to each other individually.

The insurance can be even more complicated. Given that it is compulsory to have an insurance strategy for an SMSF, it is typical for the SMSF to own insurance on the lives of the members. In the event that the SMSF is wound up, it can obviously no longer hold the insurance. In this scenario we hope they we are able to transfer the ownership and retain the cover. This is not always possible; depending on the cover, it may be necessary to cancel the insurance and replace it. There are two situations where this is problematic; if the client won’t be able to be underwritten at standard rates due to a change in their medical history or, if they have level premium cover which has locked in a premium at a younger age.

Dealing with an SMSF in divorce is not straightforward, and is just another complexity that needs to be considered before establishing one.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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