How do you change a two-member SMSF?

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According to the statistics recently published by the Australian Taxation Office (ATO), 69% of SMSFs in Australia consist of two members. I am often asked by people in two-member SMSFs what happens if one member dies or if the main decision-maker is diagnosed with a terminal illness or suffers a major health problem.

SMSF structure: Under the superannuation law, if an SMSF is established with two individual trustees and one dies, it becomes a single-member SMSF. The rule for a single-member SMSF is that if it is established under an individual trustees’ structure, then it must have two individuals acting as trustees. If it is established under a corporate trustee structure, it does not matter that the surviving member continues to act as the sole director of the company acting as the corporate trustee.

So, if one of the members dies, in order for the superannuation fund to continue as an SMSF, the surviving member will need to consider either appointing someone else to act as the second individual trustee or restructure the SMSF from an individual trustees’ structure to a corporate trustee structure.

If the member who acts as the main decision-maker is no longer able to perform trustee duties for their SMSF, then this person will need to step down as a trustee after appointing the other member, a family member or a friend, to be their legal personal representative and act as trustee. This can be achieved by giving them an enduring power of attorney. Another option is to consider winding up the SMSF by rolling its money into a public superannuation fund.

Assets of the SMSF: Under superannuation law, the only situation where an SMSF must pay out a superannuation benefit is when an SMSF member dies. The death benefit must be paid out as soon as practicable after the death. Unfortunately, the term ‘as soon as practicable’ is not defined in the legislation and the ATO has not published any guidelines. In my opinion, if the death benefit is paid promptly following the member’s death, say within 6 months after liquidating assets, it would probably be acceptable to the ATO. If there are reasonable delays that can be explained, the ATO may accept the actions of the surviving member.

What happens if the SMSF has the majority of its assets in properties or assets that cannot be liquidated easily? The SMSF could consider making an in-specie payment, where an asset is transferred to the member in lieu of paying a cash benefit. An in-specie payment cannot be made where the payment relates to benefits under financial hardship grounds, compassionate grounds or a departing superannuation payment made to a non-resident member.

Winding up the SMSF: There are a number of things that must be considered before winding up an SMSF which includes rolling super entitlements of members to a public super fund. Some super funds will allow assets such as listed shares to be transferred to them whereas others will only allow cash – which means you would need to sell the assets of the SMSF and then rollover the cash proceeds. Of course by selling assets in your SMSF, if your SMSF is in an accumulation phase, it will trigger capital gains tax payable on the sale of the assets. If your SMSF is in a pension phase then it will not have to pay capital gains tax on any sale of assets supporting the pension.

Changing assets in an SMSF: If assets in an SMSF need to be changed to simplify the management of the SMSF, due to the death or incapacity of the main decision maker, then you must ensure that any new assets added to the SMSF are in line with the SMSF’s existing investment strategy. If not, you should consider updating the investment strategy.

Do not be alarmed if you are left managing your SMSF on your own. There are SMSF professionals like myself who can assist with your decisions.

 

Monica Rule is an SMSF adviser and author of the book “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”. Monica is presenting “SMSF Success Secrets – securing your financial independence” in Sydney on 7 November 2014, where bot Noel Whittaker and Graham Hand will also be presenting. See www.monicarule.com.au for more details.

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13 Responses to How do you change a two-member SMSF?

  1. Ross October 24, 2014 at 12:16 PM #

    What happens when the surviving director of a corporate trustee (who is also the sole member of the Fund) dies? Without a board member the corporate trustee cannot act to register a transfer by the executor of the surviving director/sole member. No one can manage the fund. Can the constitution of the trustee be changed to say the auditor can act?

    • Monica Rule October 24, 2014 at 3:31 PM #

      Hi Ross,

      Thanks for your question.

      Firstly, you will need to check your SMSF Trust Deed and the company’s constitution as to whether it allows for automatic director appointment provisions. If so, it may be best to appoint a legal personal representative, or the executor of your estate, to have the power to appoint a new director.

      Section 201F of the Corporation Act 2001 does provide that, in the event of the death of a single director of a proprietary company, the executor or other personal representative appointed to administer the deceased’s estate may appoint a new director of the company. The new director will then have all the powers, rights and duties of the deceased director and will keep the company running.

      If however, there are no such provisions in the Trust Deed and the company’s constitution, then an executor is ordinarily appointed by means of a valid will. However, where there is no will, a near relative or other person would have to apply to the local Supreme Court for letters of administration to manage the estate and this could take some time.

      Another way I believe is for a Corporate Power of Attorney to be put in place. A Corporate Power of Attorney will need to be executed by the company.

      It will allow the person nominated in the Corporate Power of Attorney to do all things that the sole director could do. The fact that the sole director has died is not relevant because the Corporate Power of Attorney was executed by the company which is a separate legal entity to the sole director who signed the actual document.

      I have not dealt with too many SMSFs in this situation so I would be happy to receive comments from other readers who may have more experience on this matter.

      Monica

      • Ross Joihnstone April 2, 2015 at 1:14 PM #

        Monica, Many thanks for a solution. It raises the question of whether the corporate trustee can execute a power of Attorney which is limited to only take effect after the death of the sole member/director/secretary?
        Your help is greatly appreciated Ross

      • Liam Shorte April 30, 2015 at 10:25 PM #

        Ross, an Enduring Power of Attorney is not valid i.e. terminates after the death of the donor. The deceased person’s Legal Personal Representative is the one who may take control in the case of death subject to the constitution of the corporate trustee and trust deed but there can be complications. Accordingly, it is often recommended that either another director be appointed from the outset to act alongside the sole member, or the company trustee appoints someone as the company’s attorney, so that this person can act on behalf of the company if the member dies. In terms of managing the risk of mental or physical incapacity then you can use an Enduring Power of Attorney and prescribe the instances under which that power is activated such as “on loss of mental capacity as confirmed by 2 specialists”. This option is becoming more common as the values of SMSF balances increase, dementia and Alzheimer’s cases grow more prevalent and elder financial abuse cases are on the rise.

  2. Deborah October 25, 2014 at 11:08 AM #

    Surely, unless we both go down in the same airplane crash, it is a case of when one SMSF member dies, rather than if?
    And on the subject of incapacity, even now I sometimes wonder about my husband’s sanity!

  3. Steve October 26, 2014 at 3:08 AM #

    how can you find out if your SMSF is an individual or corporate one? I’ve forgotten how we did our as it was some years ago!

  4. Graham Hand October 26, 2014 at 8:02 AM #

    Check the name that the assets are held in, such as on a statement. The assets are in the name of the trustee, either a company or an individual(s).

  5. Wayne April 1, 2015 at 2:03 PM #

    Hi Monica,
    Is it possible for an SMSF corporate trustee to have 3 directors but only 2 members with the 3rd director being a non-member?
    Thanks,

    • Liam Shorte April 30, 2015 at 10:26 PM #

      Wayne, the answer is No I am afraid, the rules are that all trustees must be a member except in single member funds. For Self Managed Super funds other than single-member funds, an SMSF is one where:

      • there are four or less members
      • all members are trustees, or directors of the trustee company
      • there are no trustees or directors who are not members
      • there are no members who are employees of other members (unless they are relatives).

      It may be prudent to have a trust deed and company constitution that allows for the automatic appointment of a Legal Personal Representative / Executor as a company director on death of a member. An alternative in funds where voting power is based on balances then it may be possible for the third director to have a small balance and the main 2 directors still control the fund with majority voting rights.

    • Monica Rule May 11, 2015 at 12:16 PM #

      Dear Wayne,

      Thank you for your email and sorry for the late reply. I have been on a seven week overseas holiday where internet access was difficult to obtain.

      In relation to your query, you cannot appoint a company as a corporate trustee of an SMSF where only two of the directors are members of the SMSF. The superannuation law requires that where a company acts as a corporate trustee all directors of the company must also be members of the SMSF.

      Kind regards, Monica Rule

  6. Ramani April 2, 2015 at 11:57 PM #

    A related issue growing in importance with our ageing demography is the need for all SMSFs, especially those with elderly members – often a couple – to preempt the problems posed by age-related infirmity. The obligations on SMSF trustees are onerous, and there are indications that the ATO is getting more enforcement-oriented (rightly in my view, as SMSF non-compliance is not a victimless crime: the taxpayer is often the victim).

    Unfortunately, ATO guidance on trustee capacity to manage matters can be more robust than it has been. As health, family and partner care issues crowd out the mind, chances of slippage are real.

    I have advocated – as with seniors driving – a periodical capacity testing as SMSF members reach a given age (say 70). The auditor would have to talk to each trustee and certify that their capacity remains unimpaired. Auditors are not geriatric medicos, but this is better than at present (nothing).

    The ageing tsunami has the potential to wreak havoc on our social and financial fabric, and precautions are warranted. The warnings are potent.

  7. Anthony August 13, 2015 at 8:23 PM #

    One of the two trustees of a individual member fund dies, the member has a valid will and the remaining member is both executor and beneficiary of all financial and real assets as nominated in the will. Does the remaining member retain the capital within a SMSF structure and can joint accounts within the SMSF be renamed?

    • Mike H August 14, 2015 at 8:14 AM #

      I assume there are 2 trustees and 2 members.
      You need to look at the terms of the Super Fund Trust Deed for the prescribed manner in which death benefits are to be treated.
      Deceased member benefits do not automatically vest in the deceased estate.
      Check if the member executed a Binding or non binding Death Benefit Nomination.
      If not then any dependents of the deceased must be considered.

      (Sole purpose of super fund … to provide retirement and death benefits to members and their dependents )

      Be very careful with this topic as there have been several recent legal cases considering the issues.
      Ambulance chasing style law firms are targeting this sector so be aware this is a legal minefield, and obviously I don’t know your personal circumstances to offer full advice on this.

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