A legal specialist has urged SMSF trustees to carefully consider the size of the membership of a fund as a larger number of members is likely to complicate matters when considering succession planning strategies.
DBA Lawyers special counsel Bryce Figot said adding only as many members as necessary for the operation of an SMSF was likely the least complicated and most practical approach when it came to preparing for an incapacity event.
“I really think you should have as few people as possible in the fund. Unless you want [a second spouse] to run that fund when you lose capacity and die, unless you want that second spouse to get all the money, I’d be reluctant to do it,” Figot said during a recent DBA Lawyers succession planning webinar.
“When they changed the law a few years ago to allow six-member funds, I thought, holy guacamole, what a nightmare.
“Maybe in some ultra-rare situations a six-member fund is a good idea, but have as few members as possible anyway because if you’ve got six-member funds and you start saying who’s going to be running the funds when someone loses capacity, that could get you into a very impractical [situation].”
He noted a review of essential documentation relating to the operation of the SMSF should be the first step in ensuring a favourable outcome in the event of the loss of capacity or death of a member.
“Who do we want to have running the fund? And even if we get to a stage where it’s my son from a previous relationship and my second spouse, do I really want them to be running a fund together in the future?” he said.
“That seems like almost a guarantee for trouble. Identify the governing rules [and] enduring powers of attorney. [This is] vital. Not all governing rules are the same. Read the SMSF’s specific governing rules to determine whether you’re comfortable with the outcome.
“If you’re not comfortable with who’s going to be running the fund together, amend [the SMSF governing rules].”