Some great ideas and good discussion!! Some of my thoughts (for what they are worth) on a few of your comments:
Yes SMSF can hold property as tenants in common with another party but a common scenario is where the SMSF trustee owns 100% of the property and there are 2, 3 or 4 members. The members can not dispose of their interest separately in this scenario. Cash would still need to be obtained from somewhere.
As for insurance policies there can be a trap here. Imagine the SMSF owns a $1m property. There are two members in the fund with $500K member balances and both members have a $1m life/tpd policy. If one party claimed on the policy the $1m proceeds become part of their member balance so they would now need to pay a death benefit for $1.5m so the problem of needing to find $500K in cash still exists.
A few possible solutions that will depend on the individual circumstances:
- With the insurance policy you can use an insurance reserve whereby when the insurance gets paid out does not form part of the member balance so in the above scenario they would still only need to pay out $500k. There are a few issues to consider with this however such as; how that money will eventually be accessed as there are restrictions on getting money out of reserve accounts and another big issue that the member has effectively lost control of the $1m policy as it is not attributable to their member account…possible issues on death or in the event of TPD, divorce. - If there is a dependent, the fund could start a reversionary pension upon death. This would negate the need to sell the property…at least for a period of time and would need to ensure adequate cash flow to fund pension payments - If a member can raise funds outside of the SMSF, make a contribution and then pay the death benefit which would mean the property wouldn’t need to get sold and can remain in the fund ( + family). Potential issues if member cant raise funds or death benefit was larger than contribution caps. - My preferred solution to all of this is to own the property in a unit trust and have the SMSF trustee own all (or most) of the units. When doing it through a SMSF I would never own property any other way as this provides the greatest flexibility before and after death. E.g. Upon death you have the option of paying a reversionary pension (if there is a dependent around) but importantly, if there is no dependent (where a lump sum death benefit would need to be paid) the death benefit can be paid in specie meaning the member’s units in the unit trust can be paid out as a death benefit and disposed of via the estate. This would normally involve being transferred into a testamentary trust so the property does not have to be sold, it remains in the family and it is still in a tax effective environment. It also means that while everyone is still alive people can buy in and out of the unit trust without changing the owner on the title (as this is always the trustee of the unit trust). For anyone that owns property directly in their smsf or is thinking of doing so I would suggest considering the unit trust option. Obviously, DYOR on this though!!
Happy for some thoughts on these (as I definitely don’t claim to have all of the answers) and at the least, I hope this has helped!!
