My parents have an SMSF – what do I need to know?

Perhaps you don’t have an SMSF, but your parents do. As they age, you might play a more significant role in managing it. Certainly, if they die and you’re the executor, you will need to know what to do with their super balance. We have some tips! 

First – don’t panic. 

People often say, “SMSFs are complicated”. In fact, it’s probably fair to say that superannuation is complicated rather than SMSFs per se. It’s just that those with SMSFs also tend to make the most out of the super system. And to do that, you need to be across more of the rules.

A good accountant, financial adviser or even specialist SMSF administrator like Heffron will be able to help you help your parents – and they may even open your eyes to some of the improvements you could make to your own super!

We have a number of tips for those exploring SMSFs for the first time when helping aging parents.

First – understand who is in charge and make sure it’s the right people. SMSFs (like all super funds) are technically “trusts”. Trusts are just legal structures where one party (the trustee) owns things for the benefit of others (in this case, the members of the super fund or SMSF). So your parents have two roles when it comes to their SMSF. First and foremost it’s their money in the fund – they’re members. But equally importantly (or perhaps even more importantly) they are also the “trustees”. This is quite a different role with very different responsibilities. For a start, members can be concerned just with their own needs but trustees have to act in the best interests of all members (not just themselves).

Often people set up a company that is the trustee and they are the directors of the company. (We’ve written about this structure many times – it’s called having a “corporate trustee” and it’s hands down the best way to organize an SMSF). If your parents don’t have this yet and are aging, now might be the time to make the switch. Read why here. You can also read more about the various roles involved in running an SMSF here.

If your parents are still fine to make all the decisions about their fund, there’s no reason they can’t remain the trustees (directors of the trustee company) with you providing occasional help with the some of the logistics in the background. Just be careful though – trustees are allowed to do work without being paid (and in fact they have to) but other people (even family) have to be paid for work they do.

Bear in mind that “elder abuse” (where people deliberately financially exploit older relatives or friends) is a live issue and sadly becoming more prevalent. Don’t be surprised if your parents’ accountant, adviser and others are very vigilant in ensuring their clients’ best interests are being served with your involvement. It’s not personal.

If things are getting close to the point where you need to take over some of the decision making, it might be time to formally replace them as trustees of their SMSF. There are actually a couple of ways you could help here:

• if you’re happy to put some of your own super in their SMSF (it can even be a token amount), you could become a member and trustee alongside them. That means the three of you share control and responsibility for the SMSF. Take this role seriously – you (like any other director of a trustee company) have responsibility for making sure the SMSF is run with the best interests of all the members at the centre. And of course you’re equally responsible for making sure the various rules are followed. Your parents will have the same responsibility – as long as they are trustees too they can’t just leave the decision making up to you, or 

• you can actually become the trustee (director) in their place. 

You might assume it’s not possible to replace your parents as trustees – surely at that point, it’s not a “self managed” fund? In fact, you can as long as you have an enduring power of attorney for whoever you’re replacing (so for both of them if you’re replacing both).

A few things to bear in mind here: 

• it doesn’t happen automatically just because you have this enduring power of attorney. For example, you might have already used your power of attorney to sign other legal documents on their behalf. It doesn’t work that way when it comes to being the director of a company or trustee of a trust. There is legal paperwork to do so that you actually formally become a director of the company or trustee of the trust. Until then, you can’t make decisions about the SMSF. 

• Similarly (for your parents to think about) your powers as trustee of their SMSF won’t automatically end if they decide to tear up your power of attorney. 

And once you’re involved, what do you actually “do”?

If your parents have historically managed all the fund’s investments, now might be the time to consult a financial adviser.

If you’re comfortable doing that instead, there are a few things to watch with SMSF investments: 

• Plain vanilla investments like listed shares, cash and term deposits, bonds, ETFs etc can just be bought and sold in the usual way. 

• There are some extra rules to follow if the SMSF owns property or is buying a new one. In particular, watch out for situations where the property is used by what are known as “related parties” (usually this is family or businesses and other entities that their family controls). It’s really important all these dealings are at market rates and there are some extra rules to follow – your accountant or specialist administrator will be able to help you here. 

• Handle other investments with care and get advice first (again, your accountant or specialist administrator can help). 

If they have pensions in place, they’re required to take a minimum amount out of the fund each year. Don’t assume that just because they have a regular payment in place from their super fund to their personal bank account that you don’t need to double check. Most SMSF members arrange a regular payment for the amount they need and then check near the end of the year to make sure enough has been paid.  You might need to arrange a top up payment in May / June. Note that you won’t have to work out how much needs to be paid – the fund’s accountant will tell you what it is and may even proactively follow you up to double check it has been paid.

You’ll need to get a full market value of all the fund’s assets every 30 June. For things like listed shares etc, this will be easy and your accountant will do it as part of preparing the fund’s financial statements. If your fund has a property, check with your accountant to see if they have a firm they’d recommend for an updated valuation or (better still) if they can do this for you. At Heffron, for example, we use a service that provides a valuation of all our clients’ residential properties at no cost. (Sometimes our clients need to organise their own valuation if the firm we use doesn’t have enough data to automatically produce a reliable valuation but for most, that’s not the case.)

Depending on the accounting / administration service your parents use, you may also need to track down things like bank statements, dividend notices etc each year. Some accountants require these each year, others receive a lot of the data automatically. For example, at Heffron we set up “data feeds” from our SMSFs’ investments and most of the information we need is automatically sent to our software every day. We then ask about the things we can’t identify rather than every single transaction. (This also helps us double check you’ve done things like taken the minimum pension payment and we’ll prompt you if you haven’t.)

It can get overwhelming trying to deal with all this paperwork. Some firms offer a service where they can be the “mailing address” for the fund (at Heffron, we call this our “Mailbox service”). Even if your parents haven’t used this in the past, it might be a good time. Unfortunately there’s some work involved in setting it up – you’ll need to contact all the various institutions involved in your parents’ fund to change their details. But if you’re adding yourself as a new director and signatory on their various accounts, you might be doing things like this anyway.

Finally, running an SMSF is a little like running your personal finances. You have money coming in, money that needs to go out and you need to manage your cash balance. Often, older people are receiving pensions and so there’s more going out then coming in. You’ll probably have to sell investments from time to time – keep an eye on the fund’s cash balance.

On the whole, managing your parents’ SMSF is a lot like managing other aspects of their personal finances but with some extra compliance. Their SMSF accountant and (if they have one) adviser will be invaluable sources of help. 

If you don't already have an SMSF specialist accountant looking after your parents' fund, our team can help you navigate the next steps.