As SMSF trustees would be aware, the terms of your trust deed effectively set the boundaries to what you can do for and on behalf of the SMSF, either setting minimum requirements or maximum requirements or both.
And as trustees, you are liable for ensuring the fund meets its legal and regulatory obligations. Whilst you can, and arguably should, engage the help of specialists (such as financial planners and administrators) to minimise this risk, it still remains yours which of course makes the choice of your specialist partners even more important.
One other important element that needs to be addressed in the area of trust when it comes to the running of your SMSF is the choice of trustees. Under superannuation law, when it comes to an SMSF, it may feel like you actually don't have any choice over this matter as the law essentially prescribes that all members must be trustees and all trustees must be members.
However, there are a couple of important exceptions to this and for most, this will be a discussion around single member funds. In this instance, your trustee decision is decided by whether you choose to set up under an individual or corporate trustee structure. Where you set up an individual trustee structure for a single member fund, then you must have a second individual trustee, and who that is becomes one of the most important decisions you have to make. If you elect for a corporate trustee structure, then as the member, you can remain as the sole director of the corporate trustee, or you can have a second director (but no more).
What else should you consider?
There are risks and benefits with all options. If you were to choose the option of a single director of a corporate trustee, then the key benefit is that all decision making will start and end with you. You don't need to take others views into account. Although equally you can't try and apportion blame elsewhere. Whilst there are other benefits and disadvantages to a corporate trustee structure, the single biggest issue you need to consider is the ability for the fund to operate in the event of your incapacity.
Incapacity can rise in a number of circumstances, but the simplest scenario to think of is what would happen if you became seriously injured; what if you were unable to make decisions for yourself and your fund? This highlights a key consideration for SMSF owners. Often discussions around SMSFs (and super generally) talks to estate planning, but the focus becomes around planning how benefits are to be paid out of a fund. The use of binding nominations works well in this space as it directs trustees as to what they must do in the event of the death of a member.
But what if the member (and therefore trustee) is not dead, but is incapacitated and unable to make a decision legally? Estate planning around the trusteeship of your fund is perhaps an even more crucial issue, and disturbingly, often overlooked. If you were unable to act as the trustee of your fund, how could benefits be paid when necessary? Are you missing the ability to make crucial investment decisions, such as when to buy or sell particular assets?
If you actually were to pass away, and you had a single director corporate trustee in place, what happens then? Who has the ability to appoint a replacement director? Who will own the shares in the corporate trustee this often flows through your will, so there could be significant delays before any of these issues are resolved, which can then lead to delays in paying out benefits to your dependants. In other words, it can lead to significant delays in actually achieving the outcomes you were originally after and had planned for.
Importantly though, these issues are not limited just to the sole director corporate trustee structure, or to single member funds. An important issue for many SMSF members (and therefore trustees) is the confidence you have in the other trustees of your fund. Your trust deed may set out how decisions are reached, or how split decisions are dealt to. For example, some trust deeds have said one vote per membership dollar in the event of a split decision. If you have the smaller balance, are you comfortable with this?
Invest some time with experts
Like most estate planning issues, there are solutions available to these issues, and it's worth investing the time with experts to get comfort from the outset that your fund will operate the way you want, both whilst you are a trustee and in times of your incapacity. For many, the other trustees will be family members that you have comfort and trust in. But trustees always need to remember that each are liable for the actions of other trustees, so be careful in your choice. You are never bound to join or stay in a particular fund, so as your circumstances changes, it's always worth re-assessing are you in the right SMSF at this point in time.
Everybody has different needs and priorities, and it's vital that you determine the best strategy for you and your family. Talk to your financial adviser to ensure that both your SMSF investment strategy and Trust Deed are aligned to achieve your goals.
This information is current as at 14/10/2015.
This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not constitute financial advice. It has been prepared without taking account of your objectives, financial situation or needs. Because of this, before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation and needs. Information in this blog that has been provided by third parties has not been independently verified and BT Financial Group is not in any way responsible for such information.