Establishing control approach to create effective succession planning in SMSFs

He noted that there are differences in the succession planning and estate planning approach, as succession planning is about control and estate planning is about distribution. 

“Good succession planning ensures the right assets go to the right person at the right time,” he said.

“Succession planning establishes who takes over driving when a member or trustee can’t anymore. Estate planning establishes who gets the assets and how they get them.

“Super laws have changed markedly over the last 13 years or so... Simpler Super in 2007 and the more recent changes in 2017 have made super more about the current member than a wealth transfer vehicle.

“This also, however, makes succession planning more important than ever to ensure administrative ease, certainty, compliance (such as transfer balance accounts, reporting obligations etc) and, importantly, all this occurring in the most tax-effective manner possible.”

Mr Ali said that creating effective control in succession planning requires appropriate directions via the deed, company constitution and other contemporaneous documentation as to who controls the trustee of the SMSF.

“An SMSF only forms part of the member’s overall succession planning. It is important that wills, enduring powers of attorney and any other estate planning documentation align, ensuring the right people, at the right time, receive the right benefit,” he said.

Establishing and managing control 

One of the first things to note is when a member dies, they also cease to be a trustee (individual or director of a corporate trustee), according to Mr Ali. This may mean the fund fails to satisfy the definition of an SMSF.

However, the SIS Act gives six months to restructure the fund so it again satisfies the definition of an SMSF.

“With a simple fund, comprising two members, the surviving spouse may look to appoint the LPR, the executor of the deceased, as trustee in the stead,” he said. “This may be themselves or, often, it may be adult children who can assist with the running of the fund.

“Does this mean the fund will again satisfy the definition of an SMSF? Mum continuing as trustee in her own right, and, say, Mum and her two adult children as LPR for Dad?

“Yes. The fund will satisfy the definition of an SMSF if Mum and the executors of Dad’s estate are trustees of the fund, but only for a period of six months after Dad’s benefit commences to be paid. After that time, the trusteeship will need to be permanently restructured.”

However, Mr Ali noted it is important to remember super is not an estate asset, so the LPR being appointed as trustee in place of the deceased member is not an automatic appointment.

“Super exists in its own world. Your executor is only appointed trustee if the fund’s governing rules, which is the trust deed, allows for it,” he said.

“In many cases, there may be no issue with this, but in blended-family situations, it can be a major issue. There is much case law regarding the control of SMSFs such as Ioppolo & Hesford v Conti & Anor [2013] WASC 389. Four daughters from the first marriage challenged the payment of a death benefit and wanted to be appointed co-trustee of the fund as executors of the deceased. Unfortunately for them, the fund’s trust deed did not expressly allow for this.

“Remember, succession planning is about who controls a fund when the member/trustee cannot.”

Advisers also can’t underestimate the importance of the fund’s trust deed as this mandates what a fund can and cannot do.

The fund’s trust deed does not only outline if the executor can be appointed in the stead of a deceased trustee/member; it also identifies who has the power to appoint a new trustee upon a member’s death, according to Mr Ali.

“This last point is important, as single-member funds with individual trustees involve a little more thought than funds with corporate trustees,” Mr Ali noted.

“One issue is the requirement for assets to be registered in the names of the individual trustees. This can be a time-consuming process, so you only want to do it once!

“And of equal importance to deciding who will be individual co-trustee after one has passed away is clarity around whether a majority or other voting threshold is required for member decisions.

“Perhaps the LPR and the existing trustee disagree on who is going to be appointed as new trustee and/or member? This becomes even more crucial with the introduction of six-member funds — if another generation comes into the fund, who has control?

“Is it by member balance? If the LPR represents a deceased member, who had the larger balance in the fund, does that mean the LPR has more decision-making power than the existing member? Does the LPR have a casting vote?

“One also needs to be careful with shares in the corporate trustee. On the death of a director/shareholder, who inherits the shares? Shareholders can remove directors, so the deceased’s will could say the LPR inherits the deceased member’s shareholding in the corporate trustee. But one needs to be careful as to how this is structured.”