A Self-Managed Super Fund (SMSF) can provide you with a greater level of control and flexibility over your retirement savings.
Part of managing an SMSF is planning for unforeseen events that can create liquidity issues, particularly when it comes to paying out member death benefits of total and permanent disability claims when the invested assets are lumpy and not fast (or ready) to sell. Managing the liquidity of a fund and its ability to meet its obligations to its members is an ongoing Trustee responsibility.
Why would an SMSF Need Liquidity Insurance?
For investment portfolios heavily concentrated in 'illiquid' (or lumpy) assets like real estate, the greatest danger isn't always a market downturn but rather it's being forced into a fire sale to meet sudden cash obligations of an SMSF, which can destroy years of capital growth.
Our SMSF Liquidity Insurance Service is designed to provide your fund with the necessary cash flow to meet these obligations without the need for a forced sale of assets, if through unexpected death or disability the fund needs to payout member entitlements.
SMSF Liquidity Insurance Service
How to protect your SMSF entitlements and complying with the Superannuation Industry (Supervision) Regulation 4.09 impostyes a significant personal liability upon the Trustees of a SMSF if they do not comply with that legislations.
Many SMSF trustees are unaware of its implications and how failure to comply with the legislation holds them personally liable for any fines and penalties imposed.
- Core Obligation: Regulation 4.09, which came into effect in August 2012, mandates that SMSF trustees must regularly consider the life insurance needs of their fund's members, as part of the fund's investment strategy.
- Personal Liability for Trustees: The regulation establishes this duty as a "covenant." This is a legally binding undertaking to the members. If a trustee fails to consider a member's insurance needs and that member suffers a loss as a result, the trustee can be sued. Crucially, any penalties (mentioned as potentially 60 penalty units or $19,800) must be paid from the trustee's personal assets, not from the super fund's assets.
- Not a 'Set and Forget' Task: The obligation is ongoing. Trustees cannot simply note it once and forget about it. They must re-examine and document their consideration of members' insurance needs regularly, ideally annually, as members' personal and financial circumstances change. A simple one-line mention in the investment strategy is considered insufficient.
- Documentation is Key: Trustees need to create and maintain documentary evidence showing they have properly considered the circumstances of each member (e.g., their dependents, debts, income) when reviewing their insurance needs.
- Role of Professionals:
- Auditors are required to check that the SMSF is complying with this regulation.
- Accountants are generally relied upon by trustees to provide guidance on their obligations under this rule.
- Sapience Financial strongly recommend that trustees engage a professional Life Insurance Adviser to help them properly discharge this complex and serious obligation.
This is a strong warning to SMSF trustees that they ignore Regulation 4.09 at their own personal financial peril and must take active, documented steps to comply.
Why is SMSF Liquidity Insurance essential?
The key points for SMSF Trustees to consider are:
- Asset Protection: Prevents the forced sale of assets, such as property or shares, which may be undesirable or result in a significant financial loss.
- Timely Payouts: Ensures that your beneficiaries receive their entitlements promptly and efficiently, without placing financial strain on the remaining members of the fund.
- Peace of Mind: Provides certainty that your SMSF can meet its obligations in the event of a member's death, protecting the interests of all members and their beneficiaries.
- Flexibility: Allows for the proceeds of the insurance to be used to pay out death benefits as a lump sum or income stream, in accordance with your binding death benefit nomination.
How our service works
We will work with you to understand the unique circumstances of your SMSF and its members. Our process includes:
- Needs Analysis: A assessment of your fund's assets, liabilities, and potential death benefit obligations.
- Policy Structuring: Recommending the appropriate level and type of insurance cover to meet your specific needs.
- Implementation: Assisting with the application and implementation of the insurance policies within your SMSF.
- Ongoing Review: Regularly reviewing your insurance arrangements to ensure they remain appropriate as your circumstances change.
SMSF trustees must comply with the legislative requirements for managing super-account liquidity. Use our liquidity worksheet to help you begin to map out your SMSF liquidity strategy.
Secure the future of your SMSF
Don't let a lack of liquidity compromise your retirement strategy and the legacy you wish to leave behind.
How we can help
Contact us for a confidential chat about your current SMSF needs.
