The trust deed for a self-managed superannuation fund (SMSF) is arguably the fund’s most important document. But it isn’t a static document and trustees should never “set and forget” it.
There is no legal requirement to update a deed every year, or even every other year, but it is in every SMSF trustee’s interest to do so regularly – and at least once a year, particularly if legislative changes allow SMSFs to do more with their fund.
Legislation and fund circumstances
The two key areas that may necessitate updates to a trust deed are changes to legislation or changes in the circumstances of the fund.
For example, Limited Recourse Borrowing Arrangements are now permitted under law but can’t be entered into unless a trust deed specifically provides for them. So before an SMSF trustee borrows to buy a property, they need to get their trust deed ready.
Recent changes that required SMSF trustees to report asset value at market value may have also required some trust deeds to be updated if they specified how assets were to be reported.
Another thing SMSF trustees need to be on top of is whether a member might be moving from accumulation to pension phase, or if a new member will be joining the fund. Often these things happen at the beginning of a financial year, or even if they don’t, it’s a good time to consider whether any of these changes will be happening during the coming financial year.
If a member is moving into pension phase, from accumulation phase, a trust deed needs to be able to allow for an account-based pension and if there is a new member, they have to sign the relevant trustee declarations and also be added to the trust deed.
If you’re updating your estate planning, you may need to update your trust deed as well.
Binding death nominations are a useful tool for estate planning to make sure a trustee’s wishes are followed if they pass away, but trust deeds need to allow for this. Trustees may want to consider visiting a solicitor to work this out.
The investment strategy
An SMSF’s investment strategy needs to be in alignment with the trust deed and needs regular reviews as well. If a member is moving into pension phase within the fund, as well as being able to pay the pension, the trustee needs to make sure the investment strategy supports paying that pension.
This may involve increasing the focus on yield investments or liquid investments in order to be able to pay the pension on a regular basis.
There is also a minimum pension payment that has to be paid each year and there are penalties for not paying that minimum.
And if the fund will be investing in new asset classes – like borrowing to invest in property – then the investment strategy document may also need to be amended so it allows for this.
If the property is going to be a major investment for the fund, trustees would be well-placed to make a note of the single asset risk in the fund and how the benefits of holding the property will outweigh those potential risks.
So while there’s no set time to update a trust deed, take advantage of the beginning of a financial year to ensure it, and other relevant documentation, is up to date.
Important: 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. Consider the appropriateness of the information in regards to your circumstances.