SMSF Technical Education & Strategies

Trustee succession upon death or disability - the practical steps and issues

by Daniel Butler
DBA Lawyers

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:

 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.

 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.

 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.

 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 2010/2 confirm that a member can nominate more than one attorney or legal personal representative (‘LPR’) to stand in their (trustee) shoes. However, if there is 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.

 It is important to note that if someone has more than one attorney or executor and they wish to nominate more than one, 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.

 Note that 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.

 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.

 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).

A good SMSF lawyer can assist by reviewing the succession to your SMSF and assisting in determining which strategy and documents satisfies your intentions best. In particular, the SMSF governing rules and company constitution should be designed with smooth succession in mind. Note that in our view and experience, most supplier’s documents do not even cover the above strategies.

This document has been prepared for general information purposes only and should not be relied on for advice. If there is any doubt, please seek expert legal advice. Finally, copyright belongs to DBA.

Daniel Butler is Managing Director of DBA Lawyers. He is recognised as one of Australia’s leading SMSF lawyers, and is well known in the industry as being an educator and presenter of the highest quality on SMSF issues. He is also a tax lawyer and has worked predominantly in the fields of tax and superannuation over the past 27 years. Daniel is a regular seminar presenter on tax and superannuation topics to industry professionals, and has published extensively in these areas. He also has an MBA from Melbourne University. For more info on DBA Lawyers , CLICK HERE.

This article contains general information only and is no substitute for expert advice. Further, Daniel Butler & DBA Lawyers is not licensed under the Corporations Act 2001 (Cth) to give financial product advice. We therefore disclaim all liability howsoever arising from reliance onany information herein unless you are a client of DBA that has specifically requested our advice.