{"id":5305,"date":"2014-10-15T18:59:20","date_gmt":"2014-10-15T07:59:20","guid":{"rendered":"http:\/\/www.dbalawyers.com.au\/?p=5305"},"modified":"2018-10-17T12:33:27","modified_gmt":"2018-10-17T01:33:27","slug":"smsf-succession-strategies","status":"publish","type":"post","link":"https:\/\/www.dbalawyers.com.au\/smsf-deeds\/smsf-succession-strategies\/","title":{"rendered":"SMSF succession strategies"},"content":{"rendered":"
\"SMSF<\/div>\n

There are many strategies put forward on how to provide smooth and effective succession for a self managed superannuation fund (\u2018SMSF\u2019) members. Fortunately, while there is no \u2018one size fits all\u2019 solution, there are a number of strategies that are simple and cost effective that can substantially bolster your position and set the \u2018foundation\u2019 for SMSF succession. It is important to obtain documents and advice from suppliers who have the appropriate expertise as the most appropriate strategy must have regard to the background circumstances of each member. Your personal estate planning must also be consistent with your SMSF succession plans. Obtaining expert advice and implementing a tailored succession plan is the best way forward for smooth and effective succession especially with the increased emphasis on technological development and commoditisation of the SMSF industry. We now venture in to strategies that range from the basic to the more advanced stages of SMSF succession planning.<\/p>\n

Sole purpose corporate trustee<\/h3>\n

We strongly recommend that an SMSF have a sole purpose corporate trustee rather than individuals as this greatly enhances succession. The up-front cost of establishing the company generally give long-term benefits that far outweigh the upfront cost. These are conveniently summarised in Annexure A.<\/p>\n

Despite the numerous compelling reasons outlined in Annexure A, around 74% of SMSFs still have individual trustees. This is surprising considering the many long-term advantages from having a corporate trustee.<\/p>\n

The introduction of the new administrative penalty regime in mid-2014 can now result in an administrative penalty ranging from $850 to $10,200 for each contravention. Importantly here, the penalties are imposed on a per head basis for individual trustees. In contrast, the directors of a company are only jointly liable to one penalty per contravention. Thus, if an SMSF loan is made to a member or related party, and there are two individual trustees, the minimum penalty is $20,400 (compared to $10,200 for an SMSF with a corporate trustee). Loans to members\/related parties are consistently noted year after year by the ATO as one of the main contraventions in the 15,000 to 18,000 auditor contravention reports lodged with the ATO each year. Thus, for many SMSFs, it is not so much a question of not being subject to one of these penalties but is merely a question of when. In my view, this new penalty regime is the \u2018nail in the coffin\u2019 for SMSFs with individual trustees.<\/p>\n

Moreover, when you consider various legal cases, the merits of having a corporate trustee become very clear. In Katz v Grossman [2005] NSWSC 934 a family relationship between two children (Linda and Daniel) was jeopardised as a result of Linda being admitted as a co-trustee on her mother\u2019s (Evelin Katz) death to satisfy the SMSF trustee-member rules. Linda used this power on her father\u2019s (Ervin Katz) subsequent death to pay herself approximately $1.2 million of his death benefit.<\/p>\n

Ervin and Evelin were the original trustees\/members of their SMSF. After Evelin\u2019s death, Ervin appointed his daughter Linda as the other co-trustee. Shortly after Ervin\u2019s death, Linda appointed her husband (Peter Grossman) as co-trustee and refused to follow her late father\u2019s non-binding nomination (an equal sharing between her and her brother Daniel).<\/p>\n

This case could have easily been avoided if a corporate trustee had been appointed with Ervin gifting an equal number of shares (in the corporate trustee) to each child via his will. In addition, Ervin could have left a binding death benefit nomination (\u2018BDBN\u2019) paying his death benefit to his deceased estate (ie, his executor as legal personal representative (\u2018LPR\u2019)).<\/p>\n

With so many SMSFs with individual trustees currently managed by mums and dads with children who are waiting in line for succession, Katz v Grossman is a great \u2018war\u2019 story to discuss to encourage families to commence their SMSF succession planning.<\/p>\n

Thus, in summary, a corporate trustee is an essential step in the process of SMSF succession planning.<\/p>\n

Why is succession to control so important?<\/h3>\n

Many lawyers swear by the old saying that possession is 9\/10ths of the law. This general expression reflects the fact that even if you do have legal rights, having to enforce these rights causes great expense, time delay and uncertainty. In many legal battles, many give up soon after receiving a number of invoices from their lawyers, unless they are seeing some tangible progress. Entering the steps of a Supreme Court typically involves a substantial outlay.<\/p>\n

The recent decision of Wooster v Morris<\/em> [2013] VSC 594 is the most important decision ever regarding SMSF succession planning. Namely, what really matters in SMSF succession planning is the identity of who controls the fund on loss of capacity or death.<\/p>\n

Mr Morris (\u2018the deceased\u2019) had two adult daughters from a previous marriage (Mrs Wooster and Mrs Smoel; being the plaintiffs). He also had a second wife, Mrs Morris. The deceased and Mrs Morris were the members and trustees of the SMSF. The deceased made a BDBN in favour of his two daughters.<\/p>\n

After his death, Mrs Morris appointed herself as the sole director\/shareholder of a corporate trustee. She decided the BDBN (in favour of Mr Morris\u2019 two daughters) was not binding and, as sole director of the corporate trustee, decided to pay herself the $924,509 death benefit.<\/p>\n

The plaintiffs issued court proceedings seeking declarations that the BDBN was binding. A \u2018special referee\u2019 found in favour of the plaintiffs, holding the BDBN binding and that the plaintiffs were entitled to be paid the death benefit plus interest. (The parties agreed to be bound by the referee\u2019s findings.) A further legal battle over what amounts were available to be paid as a deceased member\u2019s death benefit meant that the case then ended up in the Supreme Court. The main lessons from this case are summarised below.<\/p>\n

Lesson 1 \u2014 LPR does not automatically become a trustee<\/em><\/strong><\/p>\n

Wooster v Morris<\/em> clearly dispels the myth that when a person dies their executors (LPRs) automatically become a trustee in the deceased\u2019s place. Here, the plaintiffs were the deceased\u2019s executors but they did not become trustees. This point was also confirmed in Ioppolo & Hesford v Conti<\/em> [2013] WASC 389 where the deceased member\u2019s two executor-children were unsuccessful in their case against their mother\u2019s second spouse to be appointed as SMSF trustees following their mother\u2019s death.<\/p>\n

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. I will return to this point later.<\/p>\n

Lesson 2 \u2014 BDBNs are only a partial solution at best<\/em><\/strong><\/p>\n

There is a misconception that SMSF succession planning is handled by making a BDBN. Wooster v Morris<\/em> clearly dispels this myth as well. In Wooster v Morris<\/em> 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, \u2018stand in the shoes\u2019 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 \u2018control\u2019 if the fund is more crucial.<\/p>\n

Lesson 3 \u2014 what really matters is who controls the fund<\/em><\/strong><\/p>\n

Wooster v Morris<\/em> clearly demonstrates that far more important than a BDBN is the identity of who controls the fund on a member\u2019s death or loss of capacity. As stated above, this depends to a very large degree on what the SMSF deed. In Wooster v Morris<\/em> the trustee\u2019s legal fees in defending the claim were $302,699 in one year as reflected in the fund\u2019s 2013 accounts.<\/p>\n

Thus, it is crucial that SMSF trustees and members plan succession to the trustee role to cover loss of capacity and death.<\/p>\n

How to plan for control of an SMSF with a corporate trustee<\/h3>\n

One key planning strategy for covering risks on loss of capacity or death is to have a trusted person \u2018stand in your shoes\u2019 as your successor director. This requires planning in advance to ensure the smooth transition to an SMSF. To ensure that this occurs, amongst other things, the following matters needs to be considered:<\/p>\n