Who will replace you as trustee when you die?

SMSF technical expert and columnist for The Australian newspaper
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When a self-managed super fund (SMSF) member dies, most trust deeds deem that their SMSF trusteeship ceases. This is designed to ensure that the removal of the deceased trustee from the fund won’t complicate its management.

But who replaces the deceased in order to fulfil the trustee’s duties?

Appointing a representative

A replacement trustee is needed to make decisions about the distributions of the deceased member’s death benefit. As a result, it’s very important that you carefully select this person. A replacement trustee is also vital when there is no binding death benefit nomination (BDBN) in place or if the BDBN can be challenged.

The super laws say that the deceased’s legal personal representative (LPR) can be appointed to act as trustee. Under these super laws, the LPR must be appointed within six months of death or the death benefit has to be paid out.

The super laws don’t provide a mechanism for the replacement trustee’s appointment, so this has to occur in accordance with your fund’s governing rules.

Individual trustees

Many SMSF trust deeds say that if the fund has individual trustees, its members will be given the power to appoint the replacement trustee. As the members have the right to appoint trustees, the right of the deceased member to appoint a trustee will vest in their LPR (who represents the deceased’s member’s interests) and any remaining members.

It is possible to have your trust deed written so that it automatically appoints your LPR as the replacement trustee upon your death.

Corporate trustees

What about an SMSF with directors of a corporate trustee? In this instance, the corporate trustee, or company, remains intact and the representative is likely to be influenced by the shareholding of the corporate trustee, the constitution of that corporation and the governing rules of the fund.

If the deceased member held shares in the corporate trustee, then those shares will form part of the deceased member’s estate and may be passed down in their will. (The rights of appointment will also be passed down with the change in ownership of those shares.)

Three potential problems

So far, so good, and all this seems fairly straightforward. But there are three potential problems that can arise with both individual and corporate trustees:

  • There is no LPR for a period of time after death.
  • The LPR is not a member of the fund and therefore has no vote in the appointment of a replacement trustee.
  • The LPR may be out-voted by the other existing trustees.

When these problems arise, the existing trustees or directors may be left to distribute the deceased’s death benefits and in some cases, they may choose not to act in accordance with the deceased’s wishes.

Who can be an LPR?

The super laws say it’s the executor of the will or administrator of the estate of a deceased person. These appointments must be made by the courts because a judge has to decide if the document presented is valid. This is especially important when two or more documents are found.

Example

Let’s consider the following example. Jeff is the sole member and sole director of his SMSF’s corporate trustee. He hasn’t completed a binding death benefit nomination.

Jeff has been married for two years to Jenn and they have a new baby. He also has three young adult children from his former marriage. Jeff’s current Will has appointed his wife, Jenn, as executor and his son from his previous marriage, Sam, as reserve executor who’ll act if Jenn is unable or unwilling to act.

Jeff and Jenn are injured in a building collapse while overseas. Jeff is killed and Jenn spends time recuperating before returning to Australia six months after the accident.

Upon her return, she discovers that Sam, in his capacity as executor (while Jenn was unable to act), has become the shareholder of the SMSF’s corporate trustee. As shareholder, Sam has appointed himself as the new director of the corporate trustee and resolved to distribute the entire death benefit to himself and his siblings as dependants.

Problems often arise between older children and their stepparents, but it would be foolish to think that such disputes can’t happen in all families and their SMSFs.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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