By James Power
Owning your business premises in your self-managed super fund is a popular strategy undertaken by many business owners. Lisa and Rachael are such business owners and run a PR firm in a small warehouse, which they own via their SMSF. The property is worth $750,000, which they have a limited recourse loan outstanding of $450,000.
As part of their business succession plan, Lisa and Rachael would like the limited recourse loan of $450,000 to be paid out upon the death or disability to either of them. Accordingly, both take out Life and TPD insurance cover of $450,000 each in the SMSF.
If Lisa dies, the Fund will receive insurance proceeds of $450,000, enough for Rachael to pay off the limited recourse loan. But Rachael still would not own the property outright, since Lisa’s beneficiaries need to be paid a death benefit. Lisa’s husband needs to pay off their home mortgage with the death benefit. Therefore, a 50 percent share in the property will be of no use to him. Rachael will have to sell the property to pay out the death benefit, disrupt the business and possibly sell the property at a loss.
If Lisa and Rachael structure their affairs so the existing owner would have the funds available to take full ownership of the premises, they would increase their level of cover to $825,000 each. This would pay out the loan of $450,000 plus provide enough for the surviving partner to purchase the remaining 50 percent of the property, and pay the death benefit to the deceased’s beneficiaries.
This example shows how important it is to not only have a succession plan for your business, but also for your business premises if you have purchased it in your SMSF.
James Power is the Principal at Power Wealth Management.
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