Is SMSF trusteeship is optional?

An interesting take

Why SMSF trusteeship is optional
Section 17A(1) requires, at first glance, that all members be a trustee or director of the corporate trustee of the Fund. BUT section 17A(3)(b)(ii) of the SIS Act 93 provides for a specific exclusion to the member/trustee rule where the person, acting as trustee, holds the member's EPOA. In practice this means that we may have a four member SMSF – 80 year old Dad, 78 year old Mum, Son aged 50 and his spouse aged 45 with only the Son acting as trustee of the four member SMSF. How does that happen? Simple. The Son has the EPOA for each of the other members of the Fund.​

 

A trust must have a trustee, otherwise there can be no trust. it not not optional.

SMSF law makes all beneficiaries, or their LPRs, be the trustee. So there is an option here.

Not sure what the point of this would be though? unless capacity issues

 

So can Son with EPOA in hand change any BDBN in existence for Mum and Dad to make their death benefit payments to himself and so excluding any other sibling who may exist?

 

I will assume we are discussiing a SMSF. s17A of the Superannaution Industry (Supervision) Act 1993 defines what a SMSF is. ALL members must be a trustee Director and all trustee Directors must be a member EXCEPT a single memebr fund where the additional director may be related. There can be alternate trustees and other issues but legal advice is needed as a enduring power of attorney would be required and that can be a complex matter with rsks. A fund may alternatively have human trustees but cannot have ONE trustee even if that person acts for the others under a EPOA. It defies common law. . Its often a poor choice anyway as trustees can die but companies dont. The issue with members handing control to a younger person is a family asset protection risk. It definately need the members to each be afforded independent (and private) legal advice without the son being involved. There may be a elder abuse or fraud concern.

Drafting a EPOA and changing the SMSF will also arouse the ATO to a breach concern. The ATO regularly sweep data on presnet Directors and ensure compliance with s17A. Drafting the EPOA is also a matter for a soliictor who would probably have major concerns for fraud and asset protection. There is case law on this that indicates what happens when a members director goes rogue on parents and their siblings.

Katz v Grossman [2005] NSWSC 934 and Wooster v Morris [2013] VSC 594 are cases which adviser will all be well aware of as it may affect their advice and expose them to risk for giving contrary advice.

Otherwise being a trustee is a obligation. The foundations of smsf rule is based on equality in decision making. If you dont want to be involved consider a industry fund or public offer fund. EPOAs can be effective for temporary and trusted arrangements.

Good advisers should be advising older members of options inside and outside of a SMSF as part of their life strategy. It may make good sense to have their affairs in a smsf wound up while they have capacity. Or consider what happens if that stops. I have seen people choose to have a new trustee appointed - A non-member one eg a Small Apra Fund. (SAF) You arent stuck with just a company or human trustees. There is a independent route too.

That is a option as well.

 

I had a look at the BDBN form from QSuper. States in part:

"we cannot accept nominations made under a power of attorney" Doesn't seem to say legal advice is necessary though in preparing the BDBN..

Don't know obviously if that qualification is in every BDBN form available from industry funds.

Whole lot is a minefield.

 

Yes, if the ePOA expressly gives the power. But the attorney has a fiduciary power which they need to consider when exercising it. The trust deed may also not allow it.

 

DBA Lawyers have a good review of the Wooster v Morris decision. Mrs Morris lost the case and paid damages and interest to the children of her deceased spouse. However she consumed a massive portion of the fund to defend that case prior to the decision.

Lesson 1 — LPR does not automatically become a trustee

Wooster v Morris clearly dispels the myth that when a person dies their executors (LPRs) automatically become a trustee in the deceased’s place. Here, the plaintiffs were the deceased’s executors but they did not become trustees. This point was also confirmed in Ioppolo & Hesford v Conti [2013] WASC 389 where the deceased member’s two executor-children were unsuccessful in their case against their mother’s second spouse to be appointed as SMSF trustees following their mother’s death.

The identity of trustee on death is ultimately determined by the SMSF deed. Unfortunately, there are very few SMSF deeds that appropriately distribute the power to appoint a trustee upon death or loss of capacity. Being an appointed trustee would limit abuse of death benefit payments.

Lesson 2 — BDBNs are only a partial solution at best

There is a misconception that SMSF succession planning is handled by making a BDBN. Wooster v Morris clearly dispels this myth as well. In Wooster v Morris the deceased had made a BDBN but the plaintiffs still had to spend years in legal battles to obtain any money. While a BDBN can be important, it will not necessarily be complied with. However, there is a much greater opportunity for a BDBN to be effective if an intended successor can, in essence, ‘stand in the shoes’ of the deceased to ensure that the control of the fund is not simply left to the surviving member(s). Accordingly, while a BDBN can be an important tool in SMSF succession planning, the ‘control’ if the fund is more crucial.

Lesson 3 — what really matters is who controls the fund

Wooster v Morris clearly demonstrates that far more important than a BDBN is the identity of who controls the fund on a member’s death or loss of capacity. As stated above, this depends to a very large degree on what the SMSF deed. In Wooster v Morris the trustee’s legal fees in defending the claim were $302,699 in one year as reflected in the fund’s 2013 accounts.

Thus, it is crucial that SMSF trustees and members plan succession to the trustee role to cover loss of capacity and death.

 

See Katz v Grossman. Daughter appointed as trustee with father, after her mother's death. On death of her father, daughter appoints her husband - not her brother - as second trustee. She thenused her discretion as trustee to pay entire death benefit to herself.

 

I think that case involved $1mil too. It seemed the father's intention was for this to go equally to the son and daughter, but he set it up defectively.

I wonder how they get along now.

 

I would think Christmas family gatherings would be a touch frosty.

And yes, it was a $1m death benefit. Father's will stated that the super was to be split 50/50, but there was no BDBN.

 

We have used EPOA for SMSF's where (pre Covid) some members were overseas for an extended period. So the trusteeship is not "optional" but it allowed funds with Mum and Dad (who are present) to run the show and the kids overseas can be left alone while they are out partying.

I personally like getting the kids involved. It helps start a conversation on succession planning - and I always start by simple inoffensive discussion points like signing a tax return to develop a relationship with the next generation.

 

Hi all

Can I put out an offer to purchase a property under my name with an 'and/or' nominee. And then later on nominate a trust?

I want to buy using my SMSF, and it's already been set up, but the trust will take a week or two more to get set up. There's a property I would like to make an offer on right now. so I thought purchase under my name first and nominate the trust once it gets established.

Thanks in advance.

 

You can but you shouldnt. Get some legal advice

 

A trust can be setup same day if you want to. It then gives absolute certainty to the ownership, contract and duty issues. AT THE VERY LEAST ensure the trustee company is at least formed AND formalities finalised prior to the time of the contract signing. The deed could be signed in a day or two. I reckon a trustee company "can" be formed in a hour or two and the docs printed and also signed by spouses for example before 7pm tonight.

You dont mentions if its bare trust or a fixed trust.
1. If its bare trust ensure the custodian co is formed asap. bare trust deed can follow and cant be done yet.
2. If its a unit trust you want that trustee co and the trust settled with initial unitholders (at least one) prior to the offer.

No shortcuts.

 

Thank you for the detailed response, much appreciated.

It's a bare trust.
I held off signing the contract to avoid possible double stamp duty.
So as of now the company trustee has been formed. And waiting for the trust to be established.
Another newbie question, should the purchaser be the company trustee or the trust?

 

a trust is not a legal entity. But recording it wrong can result in duty issues so seek legal advice on this.

 

Thank you very much. Yes ill speak to my conveyancer just want to understand it beforehand.

I've read some contracts which had -
Purchaser: Company A PTY LTD (as a trustee for B Property Investments Trust)

Is that how it is usually recorded?

 

You should seek legal advice. I am not about to risk telling you with incomplete info.

 

Thanks. Will do