Threat of Death in Self-Managed Investments
With the many advantages associated with SMSF, the same can’t be said in the event of death especially at a time most unexpected. In most cases, the death benefit comes from a portion that has to be sold to pay the surviving spouse.
Recently, where death and property purchase inside SMSFs are concerned, values have changed. While direct property purchase inside SMSF is allowed, it now comes with risks that were previously unheard of.
A husband and wife, both 50 years old with a super fund of $200,000 and $400,000 respectively bought a $500,000-property. They were left with $70,000 after all costs were deducted. The sudden death of the wife caused a cashing event for the super fund, leaving the husband with a major problem.
With no automatic reversionary pension due to their age and since two-thirds of the super fund belong to the wife, it will have to pay out the wife’s death benefit from a portion of the super fund that had to be sold.
Without enough cash in the super fund to pay out the wife’s death benefit, it could be awful to the husband. Other problems that this may pose include:
- The total expenditure involved in the selling of the property which includes expenses for agent’s fees, etc.
- Inability to attract a better price due to forced selling at an inopportune time.
- Selling in a fully saturated but down market.
Not only could the husband lose the big portion of his $200,000 but all of it if gearing was included and the odds were all against his favor.
- A property market dip by 20% would bring the property value to $400,000.
- Cost of sale would be $15,000 with $30,000 gone to stamp duties.
- The husband may have to pay out about $$400,000 to himself being the dependant and a significant portion of his $200,000 gone to transaction fees.
Should gearing had been involved, from a $600,000 super fund where $500,000 went to property purchase, it could have been different. From super, $300,000 could have been taken and $200,000 of which was spent on super fund deposit then with a loan could have purchased the $500,000-property.
In the event of market dip and death of the wife, the investment property may have had no equity left. The husband may have been paid out but little or nothing would be left of his own super.
The way out of this kind of dilemma is a well structured life insurance owned by the husband on the wife’s life within SMSF. This allows liquidity option in case of the wife’s death so that death benefit could have been paid without selling the property.
It means insurance policy ownership and flexible trust deed rule which would allow ownership of the insurance premium by one member over another member’s life.
There are advantages and disadvantages to property ownership in super including the risk involved with gearing. Various ownership options and flexibilities are allowed in insurance and it is a complex area. An expert advice would definitely help so you can make an educated decision where securing your finances is concerned even when faced with sudden death.