Incorrect change of SMSF trustee documentation can be costly: lawyer

“These changes need to be done by the right people using a quality document supplier,” he said.

Mr Butler said a change of trustee requires compliance with the provisions in the fund’s governing rules and the relevant legislation including the SIS Act, the Corporations Act and applicable state legislation.

“If the change isn’t executed correctly it could mean other documents executed by the purported trustee are invalid. For example, where the company that was proposed to be appointed as trustee executed a deed of variation which was deemed invalid because the old trustee was still in office," he said.

In this situation, the party who appears to act as trustee without proper authority may be left without any indemnity against the asset of the trust and may also be liable for any expenses and liabilities incurred while acting as trustee including potential legal costs.

Another consequence of not correctly changing a trustee is that third parties, especially banks, investment institutions and purchasers will not recognise the new trustee. Additionally, the fund may not be able to function until legal proceedings confirm the correct trustee position.

Mr Butler said there is no standard method for changing a trustee but the criteria in the particular SMSF deed needs to be carefully followed.

A change of trustee cannot be validly executed without the consent of a “specific entity” such as the existing trustee and/or the members, the principal employer, or some other party.

“Under some SMSF deeds, it must also be done by deed rather than just by a trustee resolution and the appointment can only occur after the requisite notice period is given,” he said.

Furthermore, some SMSF deeds, if an SMSF wants to change from an individual trustee to a corporate trustee, it must first update the deed to provide for the rules that are relevant to that structure.

Mr Butler added due to the complexities involved in the process, a wet signature is best practice in documenting the changes.

There are several steps involved in changing a trustee and they need to be strictly considered and adhered to, the first being a review of the prior document trail.

“Each prior deed must be carefully reviewed to determine the most appropriate provisions that apply to changing the trustee,” Mr Butler said.

“This review should also ascertain what documents have been validly executed to determine what constitutes the operative deed.”

If the deed is out of date and does not have clear power to undertake a change of trustee, an SMSF deed update is recommended.

There should also be a review of applicable legislation including the Trustee Act and stamp duty legislation of the relevant jurisdiction.

“In some cases, an SMSF deed does not contain adequate or clear power, and reliance on the provisions in the Trustee Act of the relevant jurisdiction is required,” Mr Butler said.

A key foundation of an effective change of trustee is that it is essential that the appropriate parties are added to the deed.

“If a party has lost capacity or is no longer in existence such as a principal employer that has been liquidated, expert legal advice should be obtained,” Mr Butler said.

Finally, the change must be correctly documented and drafted to comply with the fund’s governing rules and related factors such as resolutions, notifications and deeds.

If there are any deficiencies in the appointment of trustees, any subsequent deed amendments are likely to be invalid.

“For example, if a deed purports to appoint a corporate trustee and remove two individual trustees which is deficient, then that company would not be validly appointed as a trustee,” he said.

“Consequently, subsequent deeds executed by that company would be invalid as the company was not properly appointed in the first place.”

He concluded that although it has become common for non-lawyers to prepare these documents, it is recommended a lawyer reviews the document trail and prepare the change of trustee documents.

“Drafting documents can be considered the provision of legal services and therefore financial advisers and accountants need to be aware of the risks involved with undertaking such work,” he said.

“They may not be covered by professional indemnity insurance and may not be able to recover any fee for this task. Advisers who are involved in implementing invalid documents or not spotting issues can be embroiled in costly and lengthy legal battles,” he warned.