Changing Trustees of an SMSF

8 Apr 2015 |

Trustees of SMSFs that were set up more than 10 years ago, that are now well into their 70’s, are realising that when one of them dies a bureaucratic and administration nightmare will be created for the surviving member.

Under the SMSF rules there must always be two individuals appointed to act as trustees for an SMSF. There is the possibility of having a single member fund but there must be a second individual appointed as a trustee.

By contrast where a company is appointed to act as trustee for an SMSF all members must be directors. When there is a single member SMSF there only needs to be one director of the trustee company.

When two individuals act as trustee for an SMSF, and one of them dies, the following must occur:

  • another person be appointed to act as an individual trustee,
  • a company is formed to take over as trustee with the remaining member as a director,
  • convert the SMSF’s investments to cash and roll the surviving member’s benefits into an industry or public offer fund, or
  • wind up the SMSF and pay out the benefits to the surviving member.

To avoid this administration burden at the time of death of one of the members an extra person can be appointed as trustee, or a company can be formed to take over as trustee, now.

The documentation required to facilitate the resignation of individual trustees, and the appointment of an extra individual or company to take over as trustee, should be set out in the SMSF’s trust deed.

In many trust deeds there are clauses that state trustees of an SMSF can be removed and appointed when all or more than 75 per cent of the members agree to it in writing.

This means trustees in most cases, if the deed allows it, only need a resolution signed by all members to be drawn up. The resolution would detail the resignation of the individual trustees and the appointment of the company as trustee.

There may be other requirements such as requiring acceptance in writing by the new trustee of the fund. This can simply take the form of a letter written by the directors of the company accepting the appointment of trustee.

Once a new trustee has been appointed, whether that is an additional individual or a company, there is extra administration work required relating to the name that the SMSF’s investments are held in.

If the ATO and some sectors of the SMSF advice industry can be believed investments must changed to the new trustee’s name. I have found that this requirement has more to do with what is regarded as best practise, rather than something that is a legal requirement.

The amount of administration work required if changing the name on all investments, where an SMSF holds direct shares and managed investments, can be considerable. In addition depending on the State where the investment register is held trustees can pay stamp duty on the name change, despite there being no change in beneficial ownership.

In addition an SMSF can also pay fees charged by share registries for off market transfers to register the name change. The task of changing the name that managed investments are held in is made harder because the documentation differs between fund managers.

Instead of changing all investments trustees can limit their work to only the critical investments. These include changing the name that bank accounts and share service accounts are held in.

The more user friendly banks, after being provided with the relevant documentation, will allow the name on the bank account to be changed. Some banks can require the existing bank account to be closed and an account opened in the name of the new trustee.

Given the work involved in advising share registries and fund managers of the new bank account where income is deposited, if a bank requires a new account to be opened, trustees should take this as a signal to look for a more SMSF user friendly financial institution.

If all other investments of the SMSF are clearly shown as being owned by the fund, in other words they are held in the individual’s names as trustee for the super fund and the deed does not require it, there is no legal requirement to change the name to the new trustee.

Instead a resolution can be passed by the members that states all investments previously held by them, in their capacity as the previous trustees of the SMSF, will continue to be held on a custodial basis on behalf of the fund and the new trustee.

Some experts say that this cannot be done. If this was the case all super funds that hold managed investments through platforms, where the investments are held in a custodial capacity by the platform, would be in breach of SIS and other regulations.

One of the other major roadblocks for SMSF trustees, wanting to take the minimalist approach to changing the name the investments are held in, could be the auditor of their fund.

This matter was put to the auditor of our firm’s SMSF funds. After some debate, and providing evidence of there being no legislative requirement to change the name that investments are held in, the auditor confirmed what was being proposed would not result in an audit contravention report.

SMSF trustees before taking any action to change the trusteeship of their fund should first check their fund’s deed, and then consult with their accountant or administration service. If the process will cost thousands of dollars, and involve the trustees in mountains of paper work, trustees should seek a second opinion.

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