SMSF and Divorce: How Will a Marriage Breakdown Affect this Important Asset?

Self-managed superannuation funds (SMSFs or Do-It-Yourself Funds) are an increasingly popular financial tool, offering lower fees, a wider choice of investments and greater control than other superannuation schemes. Conceived as a way of preserving family wealth and providing for a secure retirement, they are also frequently used by couples to shelter the assets of a family business, including real property. It is hardly a surprise that SMSFs have become especially attractive to the financially sophisticated and now comprise the largest sector of the super industry. In a divorce, however, these advantages can turn into a raging legal nightmare. If you find yourself facing a marriage breakdown and if you and your spouse have assets in an SMSF, you should seek advice from an experienced family lawyer, like those at Owen Hodge Lawyers. Contact us as soon as possible at 1800 770 780 or ohl@owenhodge.com.au


SMSF Issues That Can Arise in a Divorce

SMSFs are generally regulated under Superannuation Industry (Supervision) Act 1993 and the Financial Services Reform Act 2002. Add to this mixture the intricacies of family law and tax law, and the situation can rapidly become quite complicated.

 

The assets in a super fund are generally regarded as marital assets, subject to division if the relationship ends. This is true whether you are in a married or a de facto (including same sex) relationship. These assets can be split by agreement or Family Court order. Of course, reaching an agreement under the circumstances may be quite difficult. The negotiating expertise of a family law attorney can make a great difference in your ultimate satisfaction with the result and the speed with which you and your spouse can arrive at a settlement. If the division is accomplished according to a court order, the trustees of the fund must be able to demonstrate compliance.

 

Beyond the emotional toll, however, there are a number of legal and technical issues that are peculiar to the SMSF industry. Among these are valuation of assets, division of business property and restructuring of the trust.

Valuation of Assets

 

Some assets, such as cash or publicly traded shares are easy to value at the chosen date of division. Others such as unlisted shares or real estate may be far more difficult, at least in part because of the potential for appreciation or depreciation in the future. Anecdotal evidence about one party in a divorce attempting to undervalue or hide assets in an attempt to defraud the other party is all too plentiful. The most difficult of all problems can arise when the premises of the family business, which that business must retain in order to continue to operate, is the only or major asset held by the trust.

 

Division of Business Property

 

Even when agreement about the value of business property can be achieved, the division of that property can have enormous consequences for other non-spouse business partners or co-owners. Consider the possibility that your former, and now quite estranged, spouse may become the majority shareholder in your business or your landlord – a very unhealthy situation for all parties. The potential solutions to this problem under family law, however, may have significant financial and legal ramifications under the other relevant statutes. This is clearly a situation that requires sophisticated financial, tax and legal advice.

 

Restructuring the Trust

 

SMSFs must have at least two human trustees. Commonly, the spouses are the trustees and are jointly responsible to the Australian Taxation Office. Imagine the worst situation, where one spouse flees the country with the trust property, leaving the other spouse (and sole remaining trustee) in both a newly asset-free state, and personally liable for the resulting non-compliance of the trust.

 

On a less alarming note, remember that when trustee steps down (as would likely happen in a divorce), the other will have to find someone else to act as a co-trustee. All the fund’s assets will need to be re-registered in the name of the new trustee. Many SMSFs circumvent the problem by naming a corporate trustee to handle the day-to-day management of the trust, with spouses acting as the directors of that company. This has the additional advantage of making the dissolution of the fund, distribution of assets and any other steps necessitated by the divorce easier, and far less personal.

 

This article has raised a few ideas as to the complexity of an SMSF where a marriage breaks down. However the management of a SMSF can be difficult at times even without marital challenges. A couple who share a substantial asset in an SMSF and are separating need professional assistance to manage the transfer of assets and also to readjust estate planning instruments in the light of the marriage dissolution.


How to Resolve these Problems

At Owen Hodge Lawyers, we believe that an educated client is more likely to be a satisfied client. We are committed to sharing the information and expertise you will need to make the best choices during a trying time like divorce. Few would advise setting up an SMSF in anticipation of a divorce. A carefully designed super fund that is financially self-sustaining at the outset and independently managed may be better positioned to weather many different kinds of adversity. Sometimes the issues can be more difficult to untangle.

If you are facing a marriage breakdown, you should certainly seek the advice of a family lawyer. If you and your spouse have an SMSF, that too is marital property. To deal with the very complex and multi-faceted issues that may arise with the division of this form of property and especially if the fund owns business assets, you should have the expert legal assistance of the attorneys at Owen Hodge Lawyers. Contact us today on 1800 770 780 to schedule a consultation, so that you can move beyond this difficult time and get back to life and business.

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