David Morgan, director of DFG Morgan Solicitors and Lawyers, stressed that members of an SMSF should have an expectation that their wishes will be met following their passing.
Speaking at the Class event in Sydney on 13 September, he emphasised that there are a number of things that need to be included in any trust deed.
“A deed should also be able to make changes throughout the life of the SMSF,” he said.
Moreover, Mr Morgan explained that a trust deed should prioritise death benefit payments, as well as make provision for reversionary pensions, have the ability to appoint and remove reversionary beneficiaries, and include binding death benefit nominations (BDBNs).
“The priority of payments varies between different deeds,” he said. “Some may put reversionary pensions payments first then the BDBN, and others may do it the opposite way.
“Either way, if a priority is not expressed a reversionary pension is most likely to prevail.
“However, any deed should have the ability to appoint, remove or replace.”
In regards to BDBNs, Mr Morgan said deeds should not automatically lapse and members should be able to revoke any BDBN if they wish. “Deeds should permit the members to nominate a substitute when required,” he said.
“They should also not have to be in a particular format for it to be binding.
“Procedural requirements such as the member having to provide nominations to the trustee should be kept to a minimum – keep to the old saying ‘less is more’.”
It is also imperative when updating an SMSF deed that any death benefit instruments in place continue to be effective unless revoked or replaced, he said.
“Best practice for deeds is to also include any conditions of release that are referred to in the deed that dictate when a member can receive payment,” he added.
“As well, the types of pensions the member can elect to receive should be listed and a deed of variation should permit its continuation.”
Ensuring a deed covers all eventualities, especially in regard to death payments, can reduce the risk of disputes.
“If a trust doesn’t provide the provisions that legislation provides, it may not be able to be executed to the member’s wishes,” he said. “For example, if reversionary pensions are not included, and the SIS Act allows for it but the deed doesn’t, there may be an issue.”
There are two key points that should be considered in the drafting of any SMSF deed.
“Firstly, all provisions are important but it is equally important to update a deed regularly because of legislative changes and to ensure it complies,” Mr Morgan continued.
“Old deeds could have limitations such as cash-only contributions or in-specie transfers as well as limited circumstances as to when a benefit is paid.
“It may not allow for reimbursement from a fund or proper fees to the trustee or director on an arm’s length basis.
“With estate planning disputes increasing, a good deed can go a long way to reducing this risk, so deeds need to be clear and concise.”
