One weak link in your client’s SMSF documentation chain could destroy their entire estate plan, so what do you need to know to keep everything on track?
For many of our clients, the assets in their SMSF represent a large percentage of their overall estate value. It follows that dealing with the SMSF in a client’s estate plan is often the most important part of our strategy.
This is why it is critical to review all of the documentation for the SMSF. Many clients and advisers fail to appreciate the importance of checking the whole chain of documents, not just the latest deed. As it is possible to update the trust deed for an SMSF by simply replacing the terms with a new deed, people will often simply rely on the latest deed of variation. While this document usually represents the terms of the fund, it is important to check the previous documents to ensure there are no issues in the trail and the latest document is in fact valid.
What documents do you need to see?
If you are advising clients regarding their estate planning, particularly if there could be any controversy or arguments in relation to the SMSF, it is critical to obtain copies of each of the following:
- Trust deed establishing the fund;
- Any subsequent variations;
- Any change of trustee documentation;
- Details of the directors and shareholders of the corporate trustee; and
- Constitution or memorandum and articles of association for the trustee company.
A proper review of all documents should be conducted by working through the documents chronologically and checking:
- If there are any restrictions in the variation power;
- Whether the deed of variation has been executed properly and by the right parties; and
- That any changes of trustee have been carried out properly.
What issues might you find?
Some common issues that can arise in the document reviews are:
- The trust deed was not varied in accordance with the variation power;
- A person or company that was required to consent to a variation or change of trustee has not done so (this could be the principal employer or founder);
- Documents in the chain are missing; or
- A document was not correctly signed or was not dated.
If the trust deed for the fund is lost, this raises many issues for the trustee. Every effort should be made to find the trust deed. Your clients should make inquiries with all accountants, auditors, financial planners, lawyers and bankers who have ever had any dealings with the fund in case they might have a copy of the trust deed.
What are the implications of a chink in the chain?
If there is an issue with the historical documents for the SMSF, this could have far-reaching implications for the client’s estate plan as it could be argued that the later deed or deeds are not valid.
One of the most concerning implications is that binding nominations may not be valid. The main goal in putting in place a non-lapsing binding nomination is to ensure certainty about the payment of a death benefit on the client’s death. Therefore, failing to identify that the binding nomination could be challenged is a huge risk for advisers.
Estate challenges have increased significantly over the past few decades and we are starting to see more challenges to binding nominations and superannuation benefits, particularly as this has become an increasingly large asset. A chink in the chain of documentation for the fund could be just the ammunition a disgruntled beneficiary needs to challenge a binding nomination.
Of course, in addition to the estate planning issues that may arise, there could also be compliance issues for the fund if the documentation is not in order.
What if you identify an issue with the documentation?
If you find an issue in the documentation, there are a few options.
- Do nothing
Depending on the circumstances, the risk may not be great, especially if there is no one likely to challenge the estate plan. Realistically, many clients will want to take this approach as they may be reluctant to incur additional costs if they perceive the risk to be minimal. We simply have to advise of the risks.
- Application to court
The safest option then is to apply to the court seeking an order regarding administering the fund and this is the only way of ensuring certainty. However, it can be an expensive and time-consuming process.
- Deed of ratification and confirmation
Realistically, many clients will not want to go to court. Instead, a practical, commercial alternative would be to arrange a deed of ratification and confirmation or deed of variation putting in place a new set of governing rules (depending on the issue identified). While this is only a ‘Band-Aid’ solution, in reality, it is the most practical option.
If the approach in Re Bowmil  NSWSC 161 is followed, the deed of ratification and confirmation should be signed by all possible beneficiaries of the fund, not just current members. Identifying all potential beneficiaries of an SMSF will be difficult so a prudent approach would be to include the members, members’ spouses, members’ children, other dependents and employers.
However, even if it is only possible to have the members and trustees of the SMSF sign the deed, this will still mitigate some risks. If they were a party to the deed of ratification, a beneficiary could be argued to have consented to the terms of the deed, whether it be a deed of ratification or variation confirming the governing rules for the fund.
Control is still key
Whether there are issues with the chain of documents for the fund or not and regardless of whether there are binding nominations in place, it is vital to ensure the appropriate person(s) take control of the fund on the death of a member.
Carly Fradgley, special counsel, wills, trusts and estate planning, Bell Legal Group
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