SMSF trustees: Don’t let “cognitive decline” sneak up on you

As the Australian population ages, and retirees become either fully or partially reliant on their own retirement savings instead of the government pension, the ability to manage those funds may be affected by one of the possible downsides of a long life.

The possibility of declining health, both physical and cognitive, may be uncomfortable to think about, but it’s important to ensure all your SMSF’s administrative bases are covered. Whatever happens, obligations always need to be met.

The ATO regularly encourages SMSF trustees to plan for “cognitive decline” because mental health issues – like dementia, which now affects one in 10 people over 65, and three in 10 over 85 – are becoming more common.

The ATO has stated in the past that it is generally recognised that SMSFs are usually managed by one trustee, and require a high level of financial decision making. While many trustees remain perfectly capable of effectively managing their financial affairs well past retirement age, there is a risk that some with diminished capacity to effectively manage their fund may nevertheless continue to do so.

The ATO recommends trustees make arrangements about wills, consider nominating guardians and enduring powers of attorney, both medical and financial.

Getting an SMSF ready to be wound up

Preparing an SMSF for the possibility of an unexpected wind up is relatively simple once key decision makers (powers of attorney and so on) have been appointed. According to the ATO, to wind up your fund you must:

  • complete any wind up requirements specified in the trust deed
  • pay required minimum pensions for the year
  • pay out or rollover all super (leaving a sufficient amount to pay final tax or expenses if required)
  • appoint an SMSF auditor to complete the final audit
  • complete and lodge the final SMSF annual return and pay any outstanding tax
  • after all expected liabilities have been settled and requested refunds are received, close the fund’s bank account.

Of course, you need to have a legal personal representative, with an enduring power of attorney, ready to perform these tasks if the need arises.

There are also a few “exit strategies” you can use to dissolve your fund, or change its structure so it becomes a different type of fund. For instance you can set up your SMSF so it rolls over into a public offer fund (an option, however, likely to trigger a CGT event) or convert it into a small APRA fund, which generally costs more to administer compared to an SMSF.

The ATO believes too many SMSF trustees and members are ignoring increasing trends of cognitive decline – dementia prevalence is projected to increase from a recent estimate of about 350,000 people to around 1.13 million people by 2050 (and 131.5 million worldwide). So don’t leave it to the last minute, and don’t leave it to someone is not prepared to shoulder the burden when you unexpectedly find you no longer can. Contact us if you require assistance.