Corporate trustees are a “no-brainer” approach to ensuring succession planning within an SMSF, but gaps within legislation mean trust constitutions have to be worded precisely, according to an SMSF lawyer.
DBA Lawyers senior associate William Fettes said while individual trustee SMSFs were still very common, they did not save time or money in the long run because any change of trustee added further costs to the administration of the fund.
“There’s sort of this perception that a single trustee is a cost-saving measure when it’s a false economy because there are things that need to be done if you’ve got individual trustees and people are coming and going, or a member dies or loses capacity,” Fettes said during a recent webinar.
“For example, you can’t have a sole individual member with a sole individual trustee under the trustee member rules in the Superannuation Industry (Supervision) Act.
“So, because of that, you’re going to have to restructure that fund anyway, most likely to a company structure with an individual as the sole director and sole shareholder of that company and you’re just deferring the problem to a later point in time.
“If you’ve got clients who want to do succession planning in an SMSF, a corporate trustee is a no-brainer to do that in advance.”
He warned, however, that in making the move to a corporate trustee structure, SMSF trustees needed to ensure the new fund constitution clearly mapped out who could take over from an incapacitated or deceased trustee.
“Direct succession in a corporate fund is a creature of the mechanics in the company’s constitution or the memorandum or articles of association,” he said.
“It’s important to know what the rules of the company are to understand how succession is going to work,” he added, pointing to section 201F of the Corporations Act, which allowed for a legal personal representative, acting as an attorney or executor of their will, to appoint a new director to act as trustee of the fund.
He said this would not work where the fund had two or more directors, who would also be shareholders, under a corporate trustee.
“Where there are two members under a corporate trustee, section 201F has no application in that context, so the Corporations Act doesn’t really give us much help in relation to multi-director, multi-shareholder companies that act as corporate trustees of an SMSF,” he noted.
“So we have to make sure the company constitution is doing that job as there’s a void in the Corporations Act around this and so we need to rely on having a properly drafted constitution.”
He said one solution was to use a successor directive mechanism, which allows an existing director to appoint a successor to the office who can step in and replace them as a director if certain events take place.
“This gives a smooth path to succession that you don’t otherwise get through the Corporations Act and in many, if not most, constitutions that are out there,” he noted.
