An SMSF is a type of trust that, like all trusts, is ‘run’ by its trustee. Case law tells us that one of the most fundamental duties of a trustee is that they obey the rules of that trust. The rules of the trust (sometimes referred to as the governing rules) are usually found in or annexed to the trust deed.
Without a trust deed, an SMSF trustee cannot say with any certainty that they are abiding by the rules of the trust, as the terms of the trust cannot be verified with reference to the fund’s document trail. Additionally, the SMSF trustee may encounter difficulties in dealing with other parties who want to check or rely on specific powers in the deed (eg lenders for limited recourse borrowing arrangements or SMSF auditors).
Further, without a trust deed, SMSF trustees may be on the back foot when challenged by beneficiaries on, among other things:
· the proper administration of the fund;
· a dispute about how benefits are paid;
· an argument over what rules are actually governing the fund; or
· whether something was validly done under a deed.
Thus, it is crucial that the trustee keeps the original trust deed in a safe and in a readily accessible location to ensure that it can show that any decision it makes is in accordance with the rules of the trust.
What happens when the SMSF trust deed is lost?
The first step is to exhaust every effort to find the original executed copy of the lost deed, or failing that, at least an unexecuted copy of the deed or a template of the governing rules provided by the deed supplier that the trustee considers to be the applicable rules. Accordingly, SMSF trustees should exhaust all avenues in their searches, including:
· contacting all accountants, auditors, financial planners and financial institutions who may have seen, or have a copy of, the trust deed;
· contacting the deed supplier to determine whether they retained the original trust deed or even an unexecuted copy; and
· checking the place where all other financial documents end up (this may be with an advisor or in a safe deposit box or a cupboard/drawer).
If a template or an unexecuted copy of the trust deed is found, the SMSF trustee is in a better position than if the trust deed is completely lost. The SMSF trustee may then be able to execute documents confirming that the template or unexecuted copy reflects the current rules, or to offer even more certainty, the trustee can seek an order from the relevant Supreme Court that the template or unexecuted copy is to be taken as the current rules. However, this solution is likely to be time consuming and expensive. Additionally, there can be no guarantees about what orders are actually handed down by the Supreme Court.
Variation to the rules
If approaching the Supreme Court is not possible or practical, SMSF trustees might choose to arrange for a deed of variation to be executed with as many relevant parties and beneficiaries as can be practically included as parties to the deed. Relevant beneficiaries would include anyone who could theoretically one day benefit from the SMSF (not just current members). Other relevant parties would include other persons and companies who were involved with the fund’s document trail, such as employer-sponsors of the fund. This approach provides a practical and cost effective method solution, especially where litigation is not anticipated. However, it should be borne in mind that involving other parties could present its own problems for SMSF trustees and members who would rather not approach their children, grandchildren, previous employers etc for this purpose.
The rationale for including as many relevant parties and beneficiaries as possible to the deed is that it narrows the scope for such parties to mount a legal challenge to the SMSF trustee based on issues arising from the lost deed. The intention is that beneficiaries who have signed the deed of variation as parties would be ‘estopped’ from claiming the variation was not valid. Estoppel is a legal doctrine that prevents a party from insisting on their legal rights if that would be inequitable having regard to prior representations and assumptions (such as a signing a deed of variation).
In ascertaining the beneficiaries who may be included in a deed of variation, the question arises: who are the beneficiaries? Again, beneficiaries include everyone who could theoretically one day benefit under the SMSF (not just current members). This class of persons is ordinarily ascertained by reading the provisions of the trust deed. However, where the trust deed is lost, the SMSF trustee likely cannot fully ascertain who the beneficiaries are. Hence, to reduce the likelihood of legal challenge by potential beneficiaries, the SMSF trustee would need to consider the people who would most likely challenge the trustee in the future — which is no simple task.