Estate Planning, Succession Planning

SMSF succession plan hangs on correct reading of deed

SMSF succession plan deed

An SMSF succession plan needs to start with an examination of the trust deed, and later changes, to ensure the plan will be operative in the future.

Advisers dealing with ageing SMSF members who wish to create a succession plan for their fund need to go back to the original fund deed and examine all changes from that point to the present, an SMSF expert has advised.

Speaking as part of a webinar, SmarterSMSF chief executive Aaron Dunn pointed to statistics from the ATO that showed one in every five SMSF members was over 70 and health reports from the government that indicated one in every 10 people over 65 had some form of dementia.

Dunn said the issue of succession within SMSFs with ageing members was important as the over-70 demographic held $217 billion in these funds, which was 30 per cent of the total assets held in all SMSFs.

“When looking at the quantum here, it is critically important we put in place the appropriate processes and strategies to ensure an orderly transfer of wealth when there is a death of a member, or the management of assets during events such as incapacity,” Dunn said.

He added advisers should be considering the best outcomes for fund members, including who would occupy the role of trustee if a member died or lost capacity, at the same time as ensuring the fund continued to meet the definition of an SMSF and the succession plan was consistent with a member’s will, powers of attorney and other estate plans.

The starting point ahead of any consideration of changes was the deed inside the SMSF, which should provide details of how the fund operates under particular circumstances, he said.

“There is a need to clearly determine what is operative and we see when looking at case law, which comes up very regularly now, the courts will look at the complete history of the fund to determine what deed is in effect,” he said.

“We can then look at pensions, death benefit nominations and changes of trustees and see whether they have followed procedure, based on the fund deed, and this was something that took place in the Narumon case from 2018 and in more recent cases, including the Dawson case of earlier this year.”

Dunn gave an example of a case he recently examined where an SMSF deed had been amended in the past by two trustees, one of whom was also the fund founder, but the amendment had not secured the trustee’s approval in that capacity, making it defective.

He called on SMSF practitioners to be acutely aware of who had been involved in changes to date and to ensure they had been captured in any changes because if the changes were invalid, it could negatively impact on other arrangements within the fund.

“A defective deed update can prejudice much more than the current deed. It can impact appointments, the operation of a valid binding death benefit nomination and the way income streams are paid,” he noted.

“Keep an eye on this stuff – the older funds and older clients may have had several updates along the way, but advisers need to be clear from day one that we have ironed out any little chinks and ensure that we believe, and the clients believe, that what we have is operative.”

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