SMSF members concerned about being unable to remove another member from a fund should consider the use of conditional memberships which require the exit of a member if particular events occur, an SMSF lawyer has pointed out.
DBA Lawyers senior associate William Fettes said conditional membership can be added to the documentation of an SMSF to address the fact a member cannot be forced out of the fund by other members and must provide consent before being rolled out of a fund.
“It is a concept that states if a fund is going to admit a member, it is not going to do so without some assurances and documentation in place that mitigates the risks of bringing in a new member,” Fettes said during an online presentation late last week.
“The concept there is to have a trigger for a mandated exit that can be managed by the trustee at a future point in time. How do we address the consent requirement? Well, written consent is provided upfront as a condition of being admitted.”
He said key trigger events could be tied to divorce and separation, which for married couples was well understood under the law, but the separation of a de facto couple may be harder to pinpoint.
“The essential precaution for these sort of things is having a binding financial agreement that covers the definitions and parameters of cessation of a relationship,” he said, adding conditional membership could also include issues related to member obligations and business relationships.
“You might consider failure to uphold duties, having material disagreements or a legal dispute, or if there is a business connection and the dissolution of the business relationship, or some triggering of a buy sell or equivalent-type agreement, for example as triggering events.”
He noted that alongside the trigger events, conditional membership would also require the fund to hold on file the details of the member’s nominated rollover fund.
“We will want to ensure those details are up to date and that is going to give the trustee a position that if there is a defined concept of when the member might exit, that can be moved forward in a way that would not be possible if you did not have those documents because if there’s no documentation around conditional admission, and consent to be removed, you are not able to roll out that member against their will.”