SMSFs have long been considered an appropriate vehicle for establishing a family super fund. Grant Abbott discusses a new SMSF advice structure that can ensure a fund is fit for this purpose for generations to come.
SMSFs have always been about innovation. They started with innovation by the government of the day to provide a small, choice environment for small business and families to aggregate and pool their superannuation wealth. That one innovation has sparked a colossus the larger industry and retail super funds have tried valiantly to break, but, with average balances in these large funds of $58,000 and in an SMSF over $500,000, try as they might, it’s not going to happen.
Since the advent of SMSFs in 1994, those original members have grown old and accumulated great wealth. The figures above do not lie. But being an older member has its virtues in terms of experience, but also brings a whole lot of new issues, real-day issues, to the table, including:
- How do I preserve my wealth when the laws tell me to take more and more pension each year when I actually need less and less?
- What happens to my two-member fund if I die or get dementia?
- Will my money and wealth go outside my bloodline?
From all the talks I have had with SMSF trustees over the past few years, and particularly with the older group of trustees, it is what happens to their money when they die that is now sitting front of mind. The issue of hard-earned wealth and money going outside a family’s lineage or bloodline is hugely important for many well-to-do SMSF members.
Ask your SMSF clients aged 60 and over: “Is it important for you to ensure your superannuation wealth remains for your lineage and bloodline and not be spread around to all and sundry?”
Yet here we are as an industry looking at our navels, wondering whether a binding death benefit nomination (BDBN) or reversionary pension should sit at the forefront of a client’s SMSF estate. Seriously. The cases show many BDBNs have been held to be useless and reversionary pensions without great documentation even worse. Now that does not mean estate planning or testamentary trusts are any better. The number of challenges to estates and the excessive litigation costs to get them to a result offer no solace to our clients. Our job as SMSF advisers is to solve and provide real solutions through innovation and understanding, not look in the rear-vision mirror. It is pretty hard to ride a charging horse looking backwards.
To me, all of the issues above, the fear of money going to a stepchild of a son or daughter and not a grandchild, what happens to the fund if a member is diagnosed with dementia, go towards control of the fund. The fear of a loss or lack of control in an SMSF, and for that matter a family trust, company or partnership, and life, scares even the strongest of characters. There has to be a solution and to me, there is one; one we can adopt and adapt to an SMSF and really any structure a client may be using.
That solution is a royal solution made for the times and tested over the centuries, one that ensures and really guarantees control.
A royal solution to SMSF advice
The royal solution starts with the current British monarchy and its descendant bloodline. At its apex is the leading member of the monarchy, Queen Elizabeth II. Next in line is not Prince Philip, but Prince Charles, while he is alive. If he passes away, then Prince William becomes the leading member of the monarchy. Where does that put Prince Charles’ brothers, Andrew and Edward? Well, they have their own pot of wealth, but no control unless something unbelievable happens. But after Prince William? Well, the leading member of the British monarchy would be George, if he is alive.
The cases show many BDBNs have been held to be useless and reversionary pensions without great documentation even worse.
This system of leading member control has certainly worked well for the monarchy and provided security, safety and certainty. Now this is where innovation, problem-solving and forward-thinking come in. Why not create a leading member SMSF and while we are there, although it is not for this discussion, a leading member discretionary trust, leading member company, leading member bucket company, and, well, you get the idea.
Who and what is a leading member SMSF?
I define a leading member SMSF and its role as the following: “The mission of a leading member SMSF is to look after and provide for generations of the bloodline or designated beneficiaries of the originating leading member of an SMSF. It is the highest calling and turns an SMSF from a simple investment vehicle into a multidimensional environment to protect and grow the superannuation wealth and benefits of a family of members.”
An SMSF under section 17A of the Superannuation Industry (Supervision) (SIS) Act 1993 consists of four members, all of whom must be directors of a corporate trustee. With the re-election of the Morrison government, this may soon change to six members, further opening up the advantages of a leading member SMSF.
So, who is the leading member?
The leading member is the person who controls the fund, much like an appointor in a discretionary trust or, closer to home, an employer in an old-school employer superannuation fund, who has the ability to appoint and remove the trustee and also members of the fund. In a leading member SMSF, one person or a couple may be appointed as leading members. This can be from the establishment phase or if an ordinary SMSF is to be upgraded to a leading member SMSF, part of the upgrade process is to determine which member will be the leading member.
In short, the leading member has the power to appoint and remove any trustee or members, ensure any death or other benefits only go to the leading member’s lineage by being the final voice on any BDBN or reversionary pension, and they can veto any board decision of the corporate trustee if it runs counter to benefiting or protecting lineage.
Corporate not individual trustee for a leading member SMSF
While we are here, a leading member SMSF, like the royal family, lasts for generations, which means we need a trustee that stands the test of time, hence a corporate trustee. But not any corporate trustee; we need a special-purpose leading member SMSF corporate trustee. The foundation of this special-purpose SMSF corporate trustee is that the leading member owns all the shares and thus ultimately controls the fund. When leading membership is transferred because of the death or mental incapacity of the leading member, the outgoing leading member’s shares are automatically cancelled and new shares are issued to the incoming leading member.
Note, there is no member application process for a leading member SMSF. It is a process of appointment of a lineage member to the fund. Of course, they need to consent to their being a member and, importantly, agree to abide by the governing rules of the fund and the wishes and desires of the leading member. It is their choice and, more importantly, their responsibility to protect the castle. If the proposed member is not up to it, then they should simply not join. And any member may also be terminated from the fund, for example, where they separate from their spouse and endanger the family SMSF wealth. The leading member may terminate the member and bring them back in post-separation. There is a long line of precedent for termination of members in employer super funds where a member is no longer employed by the contributing employer, and this is a similar concept.
Section 17A requires all members to be directors
Section 17A of the SIS Act requires all members to be directors, provided they have legal capacity. But like any company, not all directors have to have an equal vote. On some boards, a director may represent a major shareholder and hold sway over key decisions of the company and the board. In other circumstances, each director may have an equal vote, with a chairman holding a casting vote. Yet in others, where a company is run across multiple jurisdictions, a director from that jurisdiction may hold the casting or only vote for matters relating to that jurisdiction. Many special-purpose corporate trustees provide directors with differing votes or one member to have a casting vote.
With a leading member SMSF corporate trustee, the leading member is always the chairman with all directors holding an equal vote with the chairman having the right of veto. Remember, the mission of a leading member SMSF is to look after and provide for the generations of the originating leading member of the fund.
Unlike other SMSFs, the overriding theme in a leading member SMSF is safe, certain and secure.
Leading member SMSFs and SMSF advice
If you are not doing leading member planning for your SMSF clients, you are not thinking beyond the spouse. At many of my seminars I ask the question: Is it important that your money and assets stay within your lineage or bloodline? And 99 per cent of the attendees put their hand up and the 1 per cent who don’t, don’t understand the question. Then I look at their SMSF and wills and they could do with a good dose of leading member strategy. Whose fault is that? Why is this happening in million and multi-million-dollar SMSFs? This is evidence something is going seriously wrong in SMSF adviser land.
Leading member SMSF planning and advising takes into account a much wider set of standards and requires more specialist competencies.
The established competency standards for SMSF advising require an existing or new adviser to demonstrate the skills and abilities to advise a prospective SMSF trustee and member or an existing SMSF trustee and member on basic strategies for the fund. With 90 per cent of SMSFs structured for two members only, with the fund to be wound up with the last surviving member, the advising timeline is terminally short and lacks substance and finesse. It is no wonder many SMSF trustees do not see any real strategic value in their SMSFs apart from being able to control their investments.
Leading membership is a new concept altogether giving SMSF planning and advising a multigenerational element.
Leading member SMSF planning and advising takes into account a much wider set of standards and requires more specialist competencies. Not only must the leading member SMSF adviser be able to provide advice on SMSFs, but they must also keep in mind the mission to protect and grow the family’s superannuation wealth for generations to come. It requires strategic and thoughtful planning to cater for future generations.
It is not for all, but for those that succeed, the mantle of trusted adviser is theirs.