What should I look for in my clients’ trust deeds?

A common pressure point for SMSF accountants and advisers is to make sure their clients’ SMSF trust deeds are up to date and solidly drafted. But what sorts of things should we look for specifically?

“Review the Deed every 5 years” is a common rule of thumb – in fact we use it in our practice too. But it’s actually far more nuanced than that. As Scott Hay-Bartlem and I discussed on a recent webinar, it’s entirely possible that a 2 year old trust deed could be more problematic than one that’s been around since the turn of the century.

We landed on three top things a trust deed needs to do well in order to stand the test of time.

Deal with death

Chances are that most SMSFs will experience the death of at least one member. These days, funds are often “whole of life” structures because of the very valuable estate planning and tax opportunities they present.

But it’s critical that the deed handles death well. Some tips to look for:

• Does it properly allow for binding death benefit nominations?
• Does it allow for those nominations to be made without falling exactly into line with the normal rules for large funds (for example, a three year term, specific witnessing requirements, etc)?
• Who will have control of the fund once a member dies? (And is that what was intended?)
• Does it require particular action to be taken that might not be desirable? For example, some deeds have specific action required (such as starting pensions or paying lump sums) when a member dies.

Trustee and member rules

Death is one scenario where the trustee and member rules become critical but there are also others.

Does the deed allow for other potential changes – for example, incapacity or moving overseas (where a non-member might step in under an enduring power of attorney)? A deed that stipulates someone can only be a trustee if they are also a member could be pretty useless here!

Similarly, deeds that require funds with individual trustees to have at least two of them at all times won’t cater for those cases where that’s not actually required by the super law. Good examples are immediately after the death of a member – where the surviving trustee can act alone for 6 months and sometimes longer. Or the incapacity of one member/trustee in a two member/trustee fund where the other holds an enduring power of attorney – in this case the “single individual trustee” can remain for life.

It should also be clear how decisions are made.

For corporate trustees, the constitution becomes critical here but for funds with individual trustees, what rules are factored into the deed? For example, in some cases, proportional voting (where ‘majority rules’ are determined based on how much money a member has in the fund) may be entirely appropriate. But is everyone (all members, accountant, adviser) aware of the fact that they are in place? Will that impact strategic decisions such as withdrawals designed to even up balances, protect non-dependants from tax etc – which might mean control moves from one member to another.

There’s not necessarily a right or wrong approach here, it’s just important to know what you have.

Not too prescriptive

Trust deeds are one area where “less is more”. It’s not as common these days but still not unheard of to see deeds that (for example) :

• Have specific requirements that pensions start when a member reaches 65 or retires – this might be entirely undesirable for someone who turns 65 just before the transfer balance cap increases. Or someone who doesn’t want to start a pension (yet) for some other reason
• Limit contributions to just those specific covered by the deed – why do this? Why not just permit any contributions permitted by the law?
• Limit benefit payments to just those made in situations where members have met specific conditions of release. Again, why? This deed will require an update whenever new conditions of release are created – and this does happen occasionally. For example, release authorities (dealing with Division 293 tax, excess contributions etc) result in money being paid out under a condition of release created for this specific purpose.

In all of these cases, the deed creates unnecessary complexity without actually providing any valuable protection or benefit for the members.

All in all, trust deeds are definitely a vital document for all superannuation funds, including SMSFs. They should be reviewed carefully but there’s not an obvious “expiry date” in most cases. The most important issue for advisers and accountants is to ensure they understand the deed used by their practice, they know when their provider recommends an update and they understand any particular quirks they need to allow for when it comes to all the normal things they do – setting up pensions, making contributions, recommending strategies etc.

Our trust deed combines Heffron’s unique practical experience in dealing with thousands of SMSFs with specialist legal expertise. If you’re looking to amend your deed or set up a fund, learn more here.