Admit a conditional member

 

What is conditional membership?

If the relationship between SMSF members falls apart, seeking to remove a member from the fund can prove difficult and expensive. Conditional membership can assist with an exit strategy. This is important to consider before admitting a new member especially a child or a second/subsequent spouse.

ATO statistics suggest that around 70% of SMSFs are two member funds and anecdotal evidence suggests the vast majority of these members in around 420,000 SMSFs (600,000 SMSFs x 70%) would be in a married, de facto or spousal relationship. The total number of divorces granted in 2020 in Australia was 49,510.

Assuming there is no spousal relationship, conditional membership can still be appropriate for other potential members such as children or other family members, relatives or friends and especially business ‘partners’.

Unless there are conditional membership documents in place and appropriate powers in the SMSF deed, the member’s consent will be required prior to removing them from the fund. This can prove quite difficult and costly and may take years to resolve.

We are aware of numerous disputes (where conditional membership documents were not in place) where the departing member claimed payments well above their account balance before they agreed to exit the fund. In one case, the departing member demanded a substantial sums of cash from the other member (outside the fund) to ‘clinch’ the deal.

The conditional membership documentation suite is designed to minimise the risk of a prolonged and expensive dispute following a breakdown in the relationship between members.

Conditional membership can assist if a current SMSF member wants to admit, say, a second/subsequent spouse or a child and also wants the flexibility of removing them if a dispute or relationship breakdown ever arises.

Naturally, a binding financial agreement is also highly recommended if a spousal relationship exists as the family court has broad powers to make orders that may cover an SMSF trustee and third parties to the relationship. Note the family court also has power in relation to a de facto relationship.

Having a DBA Lawyers’ SMSF deed and a DBA Lawyers’ corporate trustee is a pre-requisite of having conditional members. If you do not have a DBA Lawyers’ SMSF deed, click here. If you do not have a DBA Lawyers’ constitution, click here.

Further, before embarking on this strategy we recommend that the SMSF trustee has the fund’s document trail reviewed by an SMSF lawyer and obtains advice to ensure the advantages, disadvantages and risks of conditional membership are properly understood

What’s included

• Covering letter with checklist
• Member application and consent form
• Product disclosure statement (PDS) (including binding death benefit nomination form)
• Trustee resolutions
• Deed of admission of conditional member
• Sundry forms
• Conditional Membership Memo

Adding a new member – Considerations?

Before you submit an admission of a conditional member form, please make sure you read and review our articles (See here and here) which contain detailed discussion on the advantages and disadvantages of adding a member to an SMSF as well as other important considerations.

Corporate Trustees

When admitting a new member to an SMSF, DBA Lawyers recommends, as a pre-requisite, you have a corporate trustee since there are many advantages of a corporate trustee over individual trustees, especially when admitting a conditional member. The DBA Lawyers’ constitution includes appropriate wording that allows the removal of the conditional member as a director of the company. For more information on corporate trustees click here and for information on a change of trustee click here.

For more information and related articles

For more information on the advantages of conditional membership in an SMSF, click on the articles below:

• Why admit a conditional member in an SMSF?
• Admit a conditional member
• Adding a member to an SMSF – pros and cons
• Ways to remove a member from an SMSF
• Your guide to an SMSF exit plan
• The advantages of conditional membership in an SMSF