SMSF trustees considering the addition of children and their partners as members of a fund should consider making that status conditional to allow for their ejection in the event there is a dispute, according to a superannuation legal specialist.
DBA Lawyers lawyer Nick Walker said while there are potential benefits in bringing in additional members to an SMSF, particularly where there is a family connection, there was no mechanism within superannuation law to easily remove them when disagreements occur.
“We have found for parents and kids in an SMSF their investment strategies and risk tolerance is quite different, but where there is a bit of friction there are not many dispute resolutions available in the fund,” Walker said during an online briefing last Friday.
“Why it is difficult to kick out a member against their will is because under the law you require the written consent of the ceasing member before they leave, which is in Superannuation Industry (Supervision) regulations 4.12, 6.27b and 6.28.”
He added this hurdle could be overcome by creating a deed that allows the admission of new members on a conditional basis where they give consent to be removed from the fund by the members with more than 50 per cent of the balance of the fund or on the occurrence of a specific event, such as divorce.
“This strategy allows for the trustee to remove a conditional member and have their benefits rolled over to another super fund,” he said.
“The conditional membership deed should work with not only the essence of the deed and governing rules, but also a company constitution if they’ve got a corporate trustee, so as to remove them as a trustee or director [of the corporate trustee].”
He gave an example of Jack and Jill, who were trustees of an SMSF with a balance of $2 million each, who admitted their children, Arthur and Jenny, with balances of $10,000 each, as conditional members of their fund. Following a relationship breakdown between Jenny and her parents, they decide to remove her from the fund.
“If Jenny was a normal member, it would be really difficult to kick her out, and I have heard war stories of some of the difficulties of removing a member against their will,” Walker stated.
“In this case because Jack and Jill got advice ahead of time and opted to go with conditional membership, and Jenny has already given consent, Jack and Jill can give her notice to exit the fund and remove her as the trustee or the director of the trustee, as the case may be.
“The end result is Jenny is out, but Arthur is still in, and if Jack and Jill later regret adding their children to the fund, they can remove him as well.”
