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The role of SMSF succession planning

Best-laid plans can go terribly wrong if the trustees of an SMSF do not put in place and then review regularly a succession plan for their fund. A lot of time and effort is dedicated to maximising the ability to contribute and accumulate funds within the SMSF, implementing and reviewing investment decisions and continual compliance and administrative management of the fund. However, unfortunately, based on statistics a large number of SMSFs do not have in place a succession plan for the control of the fund, as well as effective distribution of member interest(s) on either loss of capacity or death of a member.

The disastrous and emotional effect of this situation is becoming more and more evident as illustrated in the recent cases of Ioppolo V Conti (2015), Munro V Munro (2015) and Wooster V Morris (2013). The common theme running through all of these cases is ineffective succession planning and, hence, aggrieved beneficiaries.

What needs to be considered?

Under subsection 17A(3) of the Superannuation Industry (Supervision) (SIS) Act, a fund is still defined to be an SMSF if:

  • a member of the fund has died and the legal personal representative of the member is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during the period:

i.  beginning when the member of the fund died; and

ii.  ending when death benefits commence to be payable in respect of the member of the fund; or

•  the legal personal representative of a member of the fund is a trustee of the fund or a director of a body corporate that is the trustee of the fund, in place of the member, during any period when:

i.  the member of the fund is under a legal disability;…

A legal personal representative (LPR) is defined under section 10 of the SIS Act to mean “the executor of the will or administrator of the estate of a deceased person, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person”.

Therefore, in relation to a death of a member, the succession plan should consider and effectively document:

  • who is to continue control of the fund. What person(s) or if a corporate trustee, who will step in as a director to ensure the fund maintains compliance with section 17A of the SIS Act? Have they reviewed who are the executors of their will? Are they comfortable for the executor(s) to have a controlling position in the fund? It is also important to note, that dependent on the provisions of the trust deed, the LPR (that is, the executor) does not automatically get appointed as trustee or director of the corporate trustee. Therefore, other legal documentation may be required to make this appointment occur,
  • effective distribution through to the nominated beneficiaries or estate through automatic reversionary beneficiaries and/or binding death benefit nominations,
  • consider the tax implication and asset protection position of each distribution.

Loss of capacity is another trigger event that makes it important a strong and effective succession plan is in place. Not only is this an emotional time for the member affected and their family, but without the proper planning and documentation in place this can create further stress and risk to the compliance status of the fund. It is a recipe for disaster. Therefore, each member should have an enduring power of attorney (EPOA) in place to allow for a smooth transition should the member lose mental capacity. An EPOA is a legal document (governed by state and territory legislation) that appoints a person of trust to continue to manage the SMSF as their LPR should this situation occur. The scope of this appointment can be general in nature or can be limited to the SMSF only. The appointment process is contained in the SMSF trust deed and company constitution and once put in place should be regularly reviewed during times of capacity.

The importance of succession planning for members’ interests in an SMSF cannot be overlooked. It is critical trustees put in place the correct control mechanisms and that members develop, implement and continually review their succession plan. This is essential so as to provide peace of mind that their member interest(s) will be effectively managed and passed through to their nominated beneficiaries in a tax-effective manner on death. Documentation is the key.

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