Parents with an SMSF will often look to involve their children in the fund during the twilight years of their life. Kathleen Conroy covers off what the children really need to know if they are to play a future role in the running of an SMSF.
Statistics show Australia’s population is aging, while the wave of baby boomers is starting to hit the ‘age 65’ shore. In articles on the greying of Australia the media frequently (and understandably) addresses matters such as aged care, health and participation in the work force. This article considers aging in the context of the SMSF. Specifically, it looks at the conduct of the fund where the trustee may be losing the ability (or interest) to properly perform SMSF trustee obligations.
Statistics
About 69 per cent of all SMSFs in Australia at the end of the 2011 financial year were two-member funds; at the end of June 2012, around 62 per cent of all SMSF members were in the 55-years-plus age bracket. It is reasonable to assume the vast majority of the two-member funds are husband and wife operations.
Fund basics
I have recently had several matters born from the adult child of a fund trustee finding correspondence to ‘mum and/or dad’ from the Australian Taxation Office (ATO) about mum and/or dad’s SMSF. For many people with an elderly parent it will come as no surprise that the parent’s response when questioned about the letter can be anything from “I was going to get to that” to something vague that involves reference to (as in my parents’ case) the TV repair man.
When faced with this situation, several facts need to be gathered quite quickly. These include:
- details of the accountant for the fund;
- the whereabouts of fund documents;
- confirmation on the members of the fund;
- whether the fund has a corporate or individual trustee, and what that means; and
- if the fund has a corporate trustee, the details of that company.
Once these basics are determined, the diligent child will then either be forced to consider, or be justifiably curious to know, other significant fund details, including:
- whether a pension is being paid from the fund (and, if so, details of the pension including the amount and payment deadlines);
- details of the assets of the fund;
- the location of fund assets;
- what happens to the fund assets if mum and/or dad dies;
- ultimately, how to deal with ‘this mess’.
The issue of trustee responsibilities was raised in the Stronger Super or Cooper review. Specifically, it was noted in the Phase 3 Issues Paper that: “Many SMSF members are close to retirement or have already retired. As at 30 June 2008, 53 per cent of members were 55 and over, while 22 per cent of all members and 27 per cent of all SMSFs were fully or partially in pension phase. These SMSFs owned 47 per cent of all SMSF assets.”
The following questions were put for consideration: “As trustees age, is the potential impact of them becoming mentally incapacitated greater in the SMSF sector than for other superannuation funds and other types of financial products?
“Is there an age where the trustees of an SMSF need to be encouraged to move their retirement income arrangements out of their own hands or at least into simpler products needing less active management?”
No changes were made out of the review in this regard, and it remains the case that SMSF trustees have no obligation to prepare against the trustee becoming unable to undertake the trustee’s role. Similarly, though, it remains the case that the age of the trustee does not operate to reduce the responsibility of the fund trustee for the proper management of the fund.
Avoiding angst – what to tell the family
The more a carer child knows with respect to the basics of a fund as listed above, the better equipped they are to assist in ensuring the SMSF affairs of the trustee(s) are properly managed. There are, though, a number of valid reasons why trustees may not discuss these basics with their children. Reasons include a preference to keep SMSF matters private, and a belief that discussion of the SMSF may indicate an inability to properly look after their personal affairs.
In these circumstances, and given the above mentioned absence of any obligation on a fund trustee to draw up a contingency plan for managing fund affairs, two factors are of overriding importance.
First, the likely carer for the trustee’s administrative matters should be able to readily ascertain the legal and/or financial adviser for the fund. It is not unlikely that the adviser will have significant records for the fund, while the adviser(s) should at the least be able to explain enough to the administration carer to set that carer on the right track in ensuring fund affairs are properly conducted.
Second, the records of the fund should be centrally located, up to date and relatively clear as to all pertinent fund facts. This precaution should not present itself as an additional burden for any SMSF trustee. Maintaining fund records and accounts together with fund reporting is one of four areas of principal responsibility in the conduct of an SMSF. Outside reporting, the SMSF trustee, for example, is bound to:
- make and maintain for a minimum of 10 years:
- minutes of meetings where matters affecting the fund were considered;
- written records on the storage of any section 62A item of the fund;
- as summarised by the ATO, make and keep for a minimum of five years:
- accurate and accessible accounting records that explain the transactions and financial position of your SMSF;
- an annual operating statement and an annual statement of your SMSF’s financial position;
- copies of all SMSF annual returns lodged; and
- copies of any other statements you are required to lodge with [the ATO] or provide to other super funds.
Avoiding angst – plan for a change in control
Where a fund trustee no longer has capacity to address fund affairs, the consequences for the fund can be significant. At the most basic level, where the fund trustee has not made any plans for when the fund trustee is unable to control the fund, there is no one who can immediately step in to conduct the day-to-day administration of the fund. Given that the obligations surrounding the fund do not abate where there has been loss of capacity in a trustee, it is prudent, then, for a fund trustee to consider change in control as the trustee ages or more generally to buffer against an unexpected loss of capacity.
There are several ways to achieve this with family members, though none are necessarily ideal.
Fund with a corporate trustee
Where a single-member fund has a corporate trustee with that member as the only director, a second director can be introduced subject to certain conditions. This has the advantage for the parent trustee that the parent retains a level control of the fund, while the new child trustee has the opportunity to become familiar with the affairs of the fund at a time when the parent is still able to assist the child in this familiarisation. One of several matters that might be weighed against this approach is that the parent also retains ultimate responsibility, with the child, for the proper conduct of the fund.
Fund corporate or individual trustee
The child can be introduced as a member and a trustee of the fund. The advantages and disadvantages here include those listed above for the corporate trustee. But a new set of disadvantages and matters for consideration are also introduced when a child becomes a fund member.
The child can take the place of the member as trustee or director of a corporate trustee through an enduring power of attorney. This approach has the benefit of removing all burden for the running of the fund from the parent(s). The appointment document, however, must be properly drawn. Also, the trustee appointing the attorney(s) should ensure the power of attorney is an enduring document and all appropriate steps are taken with respect to the appointment. It is recommended the trustee seeks legal advice in the preparation of documents for this option.
Warnings
Introducing one or more of your children to your SMSF, as a member and/or trustee, is not something that should be done lightly.
Two legal cases, Triway Superannuation Fund v Commissioner of Taxation, Re [2011] AATA 302(Triway) and Katz v Grossman [2005] NSWSC 934 (Katz), are clear examples of what can go wrong where a fund is opened up to a child. In the former case, the drug addiction of the member son set off a chain of events that ultimately saw the fund gutted. In Katz, the damage was wrought after the death of the trustee parent, with the remaining trustee and member (being the daughter of the deceased) using her position to defeat the intentions of the father that the assets of the fund be split evenly between the daughter and her brother.
These two cases are arguably exceptions to the norm in both the conduct of the relevant child and the extent of the damage caused by the child. However, there are a number of matters that should be considered before a parent trustee takes the step of introducing one of more of the children to the fund:
- If the marriage of the child breaks down and the child has an account in the fund, that fund will fall into the frame when any divorce settlement is being considered (which could, at the least, be upsetting for all fund members).
- Age differences will likely give rise to significantly different needs among the fund membership, which in turn can make it increasingly difficult for the trustees to comply with their obligation to act in the best interests of all fund members.
- The risk appetite of the children members and their tolerance for bad investment years will likely be greater than for the parent(s), which can lead to difficulty and tension among trustees in formulating an appropriate investment strategy for the fund.
- Only certain of the children may be able to be fund members (with it remaining the case that the fund must have four or less members), which could give rise to resentment in those children who are not selected.
- Even if only appointed as trustees for a limited period of a parent’s incapacity, the children will be liable for the conduct of the fund during the period of the appointment, and it may well be the child is not suited to SMSF management.
At the same time, the trustees should ensure they deal with appropriately qualified and experienced persons in making any changes to fund trustees or membership. If not made in accordance with the laws and the fund deed, the change might be ineffective, while any change will require the making and documenting of resolutions, and timely notification to the ATO.
Conclusion
While ever a fund is in place, so too are a clear and onerous set of obligations as to its administration. Individual circumstances will dictate the best approach for a fund trustee to take on the question of involving children in the fund – and the extent of any such involvement. However, the nature of an SMSF makes it prudent, if not essential, for every fund trustee to plan for a time when the trustee will need ‘one of the kids’, or some other family member, to have an understanding of the fund – or at least a reasonably clear path for moving to that point.