SMSF Strategies for Successful Succession SMSF Strategies for Successful Succession

SMSF Strategies for Successful Succession

13 January 2015 | General

Self Managed Super Funds (‘SMSF’) are becoming increasing popular in Australia. The Australian Taxation Office recently reported that there are in excess of 534,000 funds in existence as at June 2014. It is important for members of a SMSF to be aware of the various strategies available to plan for succession of funds upon the death of a member as part of the member’s overall estate plan. Proper succession planning reduces the time and cost associated with the death of a member, ensures smooth member transition, and helps to prevent unexpected consequences for the remaining members of the fund.

There are a number of strategies which can enhance succession planning for SMSF members. One of the most effective approaches SMSF members may adopt is to appoint a sole purpose corporate trustee as the trustee for the fund.  Whilst it is possible for members to appoint individuals (i.e. the members themselves) as trustees of the fund, the appointment of a sole purpose corporate trustee as trustee of the fund is useful in succession planning because it greatly simplifies the succession planning process. Although this strategy may incur additional costs at the outset (i.e. over and above the cost of appointment of individual members as trustees for the fund), the appointment of a corporate trustee produces long-term benefits for the fund members that far outweigh the cost.

Appointing a company as the trustee of a fund allows the same trustee to continue as trustee upon the death of a member of the fund. This continuity of trusteeship reduces the need for time consuming and costly legal processes that occurs when a member passes away. The continuity of trusteeship also eliminates the need to liaise with stakeholders (i.e. banks, land and share registries) upon the change of a trustee of the fund. Instead, a successor director may step into the place of the deceased member (where there are multiple directors and members) or the shares in the company can be gifted via the deceased’s will (where there is a sole remaining member). The continuity of trusteeship also allows title to all the assets in the fund to remain in the company’s name, rather than requiring the title to all assets to be transferred from the deceased individual trustee.

The use of a corporate trustee also has the potential to prevent unexpected outcomes for the members of the fund. The risks associated with the appointment of individual trustees in this regard is exemplified in Katz v Grossman [2005] NSWSC 934 –a case whereby a husband (Mr Katz) and his wife (Mrs Katz) were the individual trustees of their SMSF. When Mrs Katz died Mr Katz appointed his daughter (Linda) as the other co-trustee. When Mr Katz subsequently died, Linda determined not to follow her father’s non-binding nomination (being an equal distribution of Mr Katz’s member balance between Linda and her brother) and instead Linda resolved to appoint her husband as co-trustee and Linda and her husband resolved to pay Mr Katz’s death benefit solely to Linda. This unintended outcome may have been avoided if Mr Katz had appointed a corporate trustee as a trustee of the fund and transferred control of the corporate trustee to his children in accordance with his will.

The identity of the person or entity that controls a SMSF on the death or loss of capacity of a member is also a fundamental consideration for succession planning. When such an event occurs, management of the fund remains with the surviving company director trustee or the individual trustees. The trustees will continue to make the decisions on behalf of the members and therefore have the discretion to decide to whom a member’s death benefit will be paid. This discretion is subject to restrictions contained in the legislation and the trust deed governing the fund (i.e. the trustee may be required to follow a member’s valid binding death benefit nomination (BDBN)). However, BDBNs may not be sufficient to ensure that death benefits will be effectively directed to those nominated.

In Wooster v Morris [2013] VSC 594, a member made a BDBN in favour of his two daughters. Following the member’s death, his wife (also a member and trustee of the fund), appointed herself as the sole director/shareholder of a corporate trustee determined that the BDBN was not binding, and decided to pay herself the benefit instead. While a special referee found that death benefit nomination was binding in favour of the daughters, further legal proceedings ensued in the Supreme Court to determine what amounts were available to be paid. The case illustrates that the use of a BDBN without adequate controls may result in a lengthy and costly legal proceedings before the death benefit may be paid to the intended recipient.

Whilst a BDBN may be a useful addition in succession planning, it is one of many tools that may be utilised. The more important concern for SMSF members in preparing their estate plan is the identity of the person who gains control on the death or loss of capacity of a member. If a SMSF is controlled by individual trustees, then the SMSF deed will govern the point in time that a member will cease to be a trustee (i.e. death or incapacity) and the person who has the power to appoint a new trustee in these circumstances. If the SMSF has appointed a corporate trustee, then the company constitution may outline the process for the removal and appointment of a director.

It is therefore important that SMSF members consider and, if necessary, amend SMSF documents to ensure the documents accurately reflect their wishes as part of their overall estate planning.  

Article by Jarrad Mobbs, Special Counsel and Kate Dimes Letters, Solicitor.

If you would like to tailor an estate plan to suit your needs, please contact our Wills & Estates specialist, Jarrad Mobbs.




Jarrad Mobbs

Jarrad Mobbs