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Breaking up is hard to do: why an SMSF Trust Deed is so important

Relationship breakdowns and major life changes can seriously impact an SMSF.

Break ups can be messy, especially when large amounts of money are involved, like Superannuation and property.

This is why a trust deed is extremely important when setting up an SMSF. An SMSF trust deed spells out the rules of the fund including what will happen in the event of a relationship breakdown between members. While no one wants to think about the possibility of divorce or relationship breakdown, it’s important to include a plan in the trust deed just in case.

A detailed, legally binding and signed SMSF trust deed is something we look for in every audit. We look for clauses in the trust deed to address areas of potential risk such as personal or business relationship breakdowns, incapacity or death.

The wording of the trust deed should be made appropriate to the structure of the fund and the relationships between members. If the trustees resort to legal proceedings, the trust deed outlines what was agreed at the beginning of the SMSF, or what was agreed at the most recent review. The trust deed should set out a clear and agreed plan that will be enacted if any of the following events occur:

Divorce or separation of SMSF trustees in a relationship

If SMSF trustees are a couple and their relationship breaks down, they must continue to act in accordance with the super laws and the trust deed of their fund. These rules protect members from acts of spite, malice and poor decisions. Trustees also can’t block each other from accessing information or making decisions.

Sometimes break ups get really ugly and trustees can’t communicate with each other at all. The trust deed might stipulate that a member can remain in the SMSF and delegate to another person to act as trustee on their behalf. In the case of a divorce, a trustee might choose to appoint a lawyer in their place to sort out their SMSF and other financial aspects of divorce.

Breakdown of friendship between SMSF trustees

The same rules usually apply to friendships and family relationships as to marriages and de facto relationships. Two friends or related adults are just as much at risk of disagreements as couples, especially when money is involved, so it’s a good idea to have the rules of engagement set out in the trust deed.

End of business partnership between SMSF trustees

The end of a business relationship could be because of a falling out, or it could be that someone has decided to pursue another career path and is still below retirement age.

Let’s consider a situation where one of the business partners wants to leave the business and their joint SMSF owns the business property. Unless there are enough liquid assets in the fund or another business partner trustee can be found to buy out the departing member’s share, the property may have to be sold.

If a trustee resigns, the SMSF has 6 months to restructure itself. This might mean rolling over the super holding of the resigning trustee to an industry Super fund or a different SMSF.

The SMSF trust deed should stipulate the agreed process for such situations as the end of business partnerships. This forces trustees to consider their exit plan at the beginning of the SMSF, when their relationship is positive.

Permanent incapacity or death of an SMSF trustee

If a trustee experiences a debilitating event that renders them unable to perform their responsibilities as a trustee, the trust deed should nominate that a legal personal representative or enduring power of attorney can be appointed. Debility can include reaching a state of elderly frailty, age-related cognitive impairment or dementia.

If a member dies, a legal personal representative can act on the trustee’s behalf until the death benefit becomes payable. The SMSF trust deed should include a binding death benefit nomination to ensure that Superannuation funds are paid according to the member’s wishes.

Need advice?

If your clients are dealing with a major life change or relationship breakdown within their SMSF and you need advice about how to manage it, please get in touch. We can confirm whether your proposed changes to the SMSF structure will keep the SMSF compliant. We can also advise whether your wind-up plan will be compliant if they have decided to formally part ways and close the SMSF.

We are here to help and welcome your call on 1300 TRISUP .

Joel Curry of TriSuper Auditors is one of the country’s leading SMSF auditors and winner of the 2017 SMSF Advisor – SMSF and Accounting NSW Auditor of the Year Award. Joel has personally conducted in excess of 9,000 audits and is rated in the top 5% by the ATO. He is also a highly sought-after commentator on all matters SMSF and has been published in a number of publications including SMSF Adviser, Canstar and Money.

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