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Corporate trustee not foolproof

Sign reading caution as warning on use of corporate trustee stuctures in SMSFs

Corporate trustees contain inherent flaws and weakness which can undermine their use.

Having a corporate trustee structure within an SMSF is not necessarily as robust as conventional wisdom would have people believe and may lead to certain problems upon the death of a fund member, an expert strategist has said.

“The problem we face when we have a corporate trustee is that it is extremely weak. We have a tendency when it only involves family members to pass around the shares of that trustee company as though they are like candy and mean nothing,” I Love SMSF founder Grant Abbott said during his latest strategy webinar.

“The problem with that is when someone dies, [the deceased member’s] shares go into an executorial pot if they happen to have a will. That’s extremely dangerous because it means the executor [of the will] effectively, if they’re shareholders, can end up with a majority of shares.

“Then they can have a meeting, get rid of the other directors of the trustee company and if you’ve got a good deed, if you’re no longer a director, you can get kicked out as a member of the SMSF.”

Having a member hierarchy in the SMSF with a leading member, who represents the controlling or head person in the fund, and including leading-member provisions in the corporate trustee company’s constitution will provide a solution for this issue, according to Abbott.

“So within the company constitution the transfer on death, bankruptcy and also incapacity dictates the leading member’s shares are passed onto the next leading member,” he noted.

“They’re not passed on through the estate, they are actually cancelled, and new shares are issued to leading member number two.”

This process ensures control over the fund is passed on, subsequent to an event such as the death of a member, as intended, he said.

He pointed out existing corporate trustee arrangements can incorporate this arrangement simply by performing a constitutional upgrade for the trustee company.

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