The significant size of SMSF balances means trustees should engage in estate planning for their fund, including what would happen in a worst-case scenario and whether changes are needed to alter that potential outcome, a legal specialist has stated.
SuperCentral superannuation special counsel Michael Hallinan noted the first consideration in a plan should be what would trigger a crisis in an SMSF for trustees, which was a topic that should be broached by their advice practitioners.
“What is each fund’s ‘Armageddon’ or worst-case scenario? This will be subjective for each SMSF,” Hallinan acknowledged.
“For example, in a husband and wife fund, where the wife always left the running of the fund to her husband, what if the husband suddenly died or lost mental capacity? Could the wife continue with the fund or would it all be too hard for her?
“If the worst-case scenario happened, what are the options? For instance, could the surviving member continue to operate the fund, perhaps as a sole director of a corporate trustee, or would it be better to simply wind up the fund and roll over to an Australian Prudential Regulation Authority (APRA)-regulated or small APRA fund?”
He indicated fund documents would play a large part in determining any outcomes and they should be structured to deal with worst-case scenarios.
“It is essential for the constituent documents of the fund to authorise any ‘Armageddon’ strategies to be implemented,” he explained.
“For instance, making a binding death benefit nomination (BDBN) can achieve certainty regarding payment of a super death benefit and can prevent disputes. However, does the fund trust deed authorise a BDBN to be made? If so, would the BDBN lapse after three years or can it be non-lapsing?
“What about the trustee constitution? In a two-member fund with a corporate trustee, if one member dies, the survivor can usually carry on as the sole director/shareholder. However, the trustee constitution must authorise this.”
As such, he recommended changes to trust deeds or constitutions and that practitioners should make a point of using updated versions with all clients.
“If the fund trust deed and/or trustee constitution do not authorise the relevant ‘Armageddon’ strategies, they will require amendment,” he said.
“Consider also whether the trust deed should be completely updated or should the amendment be more bespoke, especially where necessary to ‘grandfather’ previous provisions.
“It may make sense, and ultimately save your clients angst and expense, to have the trust deeds for all clients fully updated to a modern trust deed, well before their ‘Armageddon’ arrives.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason