Q: What should we have in place to cover the situation when one of the two individual trustees passes away (in an SMSF)?
A: What I need to highlight here, is we’re looking at individual trustees and not a company acting as trustee. We’ve got two individual trustees. Now, if I go back 10 or 15 years, this is a very common way of doing it. Over time, we’ve seen most people move to what is a corporate trustee. But there’s still a whole heap of funds out there that have got individuals as the trustee. And each of those funds is going to have its own unique set of circumstances which do need to be looked at. Generally, if we looked at this for what are the issues that most funds with individual trustees would need to keep in mind is identifying who is going to come in and take over as the second individual trustee. You can’t have a one member SMSF with one individual trustee. That’s not how trust law works. You can’t essentially act as trustee by yourself, for yourself. You need to have at least two.
So, we’ve gone here from a two member fund with two individual trustees. One of the members passes away. They are no longer, of course, therefore, a trustee. We need to make sure somebody else has been identified who can step in and take over in that trustee role. Now, the law that I refer to is the Section 17A of the Superannuation Industry Supervision Act 1993 (SIS Act), sets out that your legal personal representative (LPR) can step in and act for you on your death and until such time as death benefits starts to be paid out from the fund.
For example, if I die today, I cease to be a trustee today. My LPR can step in and take over as trustee. But the day that we start paying out my death benefits, that person has to be removed. And you have to have a permanent trustee from that point going forward. So, you need to be able to identify who that person is going to be, who is going to step in. That process is not automatic. Again, they would need to consent to becoming a trustee, application for trustees, execute minutes and resolutions. It’s a process which has to be followed. But you do need to appoint a second individual trustee.
All the SMSF assets are required to be held in the name owned by the trustees of the fund. For example, if it’s Garth and Rob as trustee for the Garth and Rob Super fund, all assets needs to be held in Garth and Rob as trustee for Garth and Rob Super fund. Garth’s dead, you’ve now got to go change all that to the new person and Rob as trustee. So you’ll see there is a bit of a process there that has to be followed. If this was the case, what I would consider is probably moving to a corporate trustee at that point in time. Replacing the remaining one individual trustee with a company, and that therefore, that one remaining member can continue as a one member fund with a corporate trustee, with one director. So, it’s going to be different for everyone. Step one is making sure you’ve got someone identified as being that next person to step in and act if something happens or consider moving to a corporate trustee.
What I need to stress here also is making sure that the right person can be appointed into this capacity, that they can be. So, what I’m looking for here is referring to the SMSF trust deed that you have and any specific requirements for that appointment to take place. Look, most trust deeds nowadays are quite clear around this that say that the member’s legal person representative can be appointed. Just follow that process to do it.
Just an interesting one here that has happened a few times in the last four or five years. We’ve got to remember, the person that’s going to come in and step in your shoes to take over as the trustee, and let’s say the individual trustee, they’ve got to be an ‘allowed’ person. They can’t be disqualified, for instance. They can’t be bankrupt. They can’t be someone who the regulator is setting as a disqualified person.
Why I raised this is that in the last few years, we’ve been called into assist where the person who’s been nominated as the takeover, the person to take over as trustee, actually can’t fulfil that role because they’re disqualified. So, this is the whole thing I come back to. Once we put these plans in place, we need to continually refer to them and refresh them to make sure that if they’re ever called upon, that person can step in and act at the right time. So again, check your trust deed around wordings. But that is usually what would happen with an individual trust.