Succession to an SMSF

A key planning element for covering risks on death or incapacity is to have a trusted person stand in as your successor trustee/director.

This requires planning in advance to ensure the smooth transition to a self managed superannuation fund.

To ensure that this occurs, amongst other things, the following needs to be undertaken.

Selection

Select the person who is to become trustee/director. Ensure they are willing to act and there are sufficient instructions/wishes documented for them on what needs to be done.

Deed

Check the SMSF deed and, if a corporate trustee is in place, the constitution to see what steps and documents need completing to appoint that person. Typically, in addition to that person consenting in writing, they may need to satisfy some other hurdles and better to discover these now; otherwise it may be too late.

Voting mechanism

In so checking the deed/constitution it is important to check what voting mechanism applies, eg, are decisions determined by the number of trustees/directors, member account balances, shares held in the corporate trustee or via some other method. This is important as it may need amending if it is not appropriate. For example, if the relevant member has the lion’s share of the fund, and voting is based on the number of trustees/directors, then this could give rise to an unnecessary deadlock. One mechanism to work through this type of deadlock would be to give the person with the majority account balance a casting vote by tailoring the documents accordingly.

Nominating appropriate person

Make sure the person’s Will and enduring power of attorney (‘EPoA’) nominate the appropriate person that they wish to stand in their shoes. Note, the ATO in SMSFR 2008/D1 consider that a member can only nominate one attorney or legal personal representative (‘LPR’) to stand in their (trustee) shoes. Thus, if there are more than one attorney/LPR, the nomination should specify who has first go and it is also advisable to specify one or two substitutes who can also step in should the member’s first choice be unavailable or refuses to act, etc; this is similar to nominating executors in a will as the chosen executor may not wish to act. Also, a nominated SMSF trustee/director could be disqualified if they are bankrupt or if they have ever been convicted of an offence involving dishonesty.

More than one attorney or executor

It is important to note that if someone has more than one attorney or executor and they wish to nominate more than one (despite the ATO’s current view in SMSFR 2008/D1), that the voting and decision provisions of the relevant SMSF deed and constitution should be carefully examined. This is because unless there are special provisions to equalise voting, each attorney/executor will have equal control. However, the attorney/executor who is standing in for the incapacitated/deceased member should only assume this (one) person voting capacity. Thus, if there are two attorney/executors nominated to act jointly, the joint attorney/executors should only have the equivalent of one vote.

Constitution

In the case of a corporate trustee, the decision making depends in the first instance on what’s in the constitution (and not the deed). In most constitutions directors usually have an equal vote regardless of the number of shares they hold or their account balance in the Fund. The casting or deciding vote is generally given to the chairperson of the meeting. Given, that most mum and dad companies do not comply with formalities, there is generally no practical mechanism to work through potential deadlocks. One solution could be, for instance, if there is a deadlock the person with the most voting shares can have a casting vote. Again, the constitution could be tailored to provide such a mechanism.

Corporate trustee

There are numerous advantages for using a corporate trustee compared to individuals as trustees. However, if the SMSF deed provides the majority of members may hire and fire the trustee, then the company could be removed. Thus even if a corporate trustee is used, it is worthwhile checking the mechanism for changing a trustee to ensure a smooth and planned succession can occur. For example, if you have nominated someone to become appointed as trustee/director, then this person could be voted out soon afterwards if the deed or constitution allows this by say empowering the other trustees/directors to carry a majority vote.

Successor shareholder

Where a corporate trustee is used, it is also important to consider who will be the successor shareholder as the shareholders generally hire and fire the directors.

Thus succession involves a review of both the SMSF deed and the constitution and these two need to be consistent in design and the implementation of the succession strategy to overcome conflicts arising.

DBA can assist

DBA can assist by reviewing the succession to your SMSF and assisting in determining which strategy and documents satisfies your intentions best.

In particular, our SMSF governing rules and company constitution are designed with smooth succession in mind. Most other supplier’s documents do not even cover the above strategies.