In accordance with superannuation law, all SMSF trustees are required to regularly review their fund investment strategy. This is fair enough. Of equal importance is a regular review of the trusteeship of a fund!
In light of many recent court cases, it’s crucial to recognise that the members won’t always be the trustee of the fund. This means their desired benefit outcomes may be at risk. After all, at the time decisions are being made, the member may indeed have passed away. Therefore, one of the most important issues that needs to be addressed, right from the moment a fund is established, is: what happens when a member dies or loses capacity?
These may not be questions that trustees want to address, particularly when establishing a fund, but ultimately one of the first questions asked should be “who’s going to look after your fund when you die?” This question becomes more relevant as each year passes.
Disputes often happen after a member has passed away. These disputes could quite possibly be avoided. Paying attention to fund trusteeship is not just reserved for death as it is equally important if a member loses capacity or appoints an enduring power of attorney.
Given that the concept of control is considered a selling point for SMSFs there is no greater issue for SMSF members than who controls the fund when they can’t.
At the very least, there are four documents that all trustees should regularly review, five once a pension is started:
- Member’s Will
- Member’s Enduring Power of Attorney (EPOA)
- SMSF Trust Deed
- Member’s nomination of beneficiary
- Pension agreement
Arguably, no-one should be comfortable establishing an SMSF until they have executed the first two documents. Certainly, any SMSF professional discussing the merits of establishing an SMSF should be highlighting these key documents as part of their due diligence. They should also make it very clear that appropriate legal advice should be sought for creating any legal document. There is no doubt that inadequate documentation is the source of many problems, and off-the-shelf documents that don’t give consideration to personal circumstances are likely inadequate.
Superannuation law itself provides a mild antidote at best in the event something happens to a member. In the event that a member has died, the member’s legal personal representative ‘MAY’ be appointed to replace them as trustee or director of the corporate trustee. ‘May’ has as much conviction as ‘perhaps’ or ‘if you are so inclined’. If a member hasn’t got a Will or an EPOA, then ‘may’ has even less meaning. Of course, there will also be members who have a Court or otherwise appointed Legal Personal Representative (LPR), such as some with a legal incapacity to act, but this still doesn’t overcome the weakness of the law.
To overcome the legislative weakness, strength can come from the Trust Deed, where the Deed imposes a requirement to appoint the member’s LPR in the event of death or incapacity, but again the wording will be important. There are plenty of Deeds around that don’t mandate any trustee appointment. There are also Deeds that remain unclear as to who holds the power to act and what instructions are binding or otherwise.
Of course, all this leads to the important issue of who a member appoints to act on their behalf both under the EPOA, or as LPR if they die:
- Is it their spouse who already understands the responsibility of being trustee, what if their capacity is waning or they have passed away at the same time?
- Are there any children and are they interested in the role, do they want the responsibility? Further, what if the children are in the fund and have appointed a parent as their LPR but the parents have separated?
- What conflicts might be created by the appointment of an LPR?
- What if a member doesn’t lose capacity but wants to travel and appoint their EPOA to act on their behalf whilst away? Does that person want all the responsibility that goes with being a trustee while the member is taking time away to explore the world or enjoy their retirement?
So establishing who controls the fund is a critical pain point for all SMSFs.
Ultimately what most people will want is a process where all wishes are being considered and the greed of a few does not dictate the outcome.
That brings us to the last two documents that should, if they don’t already, go hand in hand for all SMSF members, unless of course the member is not in receipt of an income stream. The nomination of beneficiary and any pension agreement should, as much as possible, achieve the same outcome. Who does the member want to receive their money? Most, if not all members, have an answer to that but do they provide adequate instructions that lead others to the same conclusion. If members haven’t reviewed the Deed, their EPOA or their Will, can they rely on their instructions being followed?
Of course, they can make a binding nomination that should give them comfort but is it made in accordance with the Trust Deed of the Fund or do they have a pension document that has a contrary position? What takes precedence?
Having an SMSF with the perception that you have control is one thing, actually having and maintaining that control beyond your own capacity or life is another.
It is something that needs to be reviewed at worst as regularly as the fund’s investment strategy, at best at every family occasion where you are reminded that you can choose your friends but not your relatives.
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 regard to your circumstances.