SMSF - Don't forget to protect your backside (and your family's)

With almost 500,000 Self Managed Super Funds (SMSF) being set up in Australia, there is an increased concern within government and industry that some clients may not know the extent to which they need to be compliant.

One area in particular that is of concern is that of adequate protection within your SMSF. When moving super out of the retail funds such as industry funds, the automatic insurance that was linked to the account is lost. To some, this may not worry them, but if borrowing within the super fund, like so many have done thus far, the area of ‘Liquidity‘ becomes a very important factor.

If you have borrowed within your super fund, and you are the main ‘guarantor’ on the loan, then on your death or permanent disability, the bank will ‘Call the Loan’, simply because they want to make sure they are paid when you are no longer here.

What happens when the bank calls the loan on your death?

In order for your family or estate to pay the loan back to the bank, they will need money. This seems simple enough.

But where is that money going to come from? They can do one of two things:

1) Sell the asset in your super fund at that time (This would be at a fire sale rate as the funds are needed immediately, potentially selling for under market value) or;

2) SMSF Insurance – Take the proceeds from a life insurance benefit to pay out the lender, retaining the asset (property, etc) within the fund, to be paid to your estate/beneficiaries, etc)

What if there is more than one person or a couple within your SMSF:

If there are other family members within your SMSF, and the fund needs to pay your portion of the estate out, the remaining members share will drop dramatically.  Insurance for the amount needed to ‘buy out’ your share of the SMSF for your estate is vital in keeping within the laws and must do for the welfare of other members of the fund.

The law says you ‘Must consider life insurance within the fund’. While its not manditory,  taking into account the points above you may find that by not taking into account liquidity issues actually impacts on your compliance of the fund.  You could find yourself in big trouble with a very expensive story to tell to the regulator or worse, leaving those that you love in a very poor position on your death.

How do you know if you are complying with this part of the regulations?

Firstly, get in touch with the accountants who helped you set up your fund, as they are ultimately responsible for the advice you receive on your SMSF.     I can give you some points to consider and some figures to determine whether you can afford  not to have protection within the fund.

If you have an questions, get in touch.

Anthony