Providing the right advice to super trustees

Advisers often ask in what circumstances should they consider advising their clients to retire as trustee of their self-managed superannuation fund (SMSF) and appoint an approved trustee to act as the trustee of the fund.

Following recent legislation enforcing strict penalties upon negligent SMSF trustees, advisers are becoming more aware of the ramifications for their clients and themselves, where a SMSF trustee fails in its duties.

SMSFs continue to be the fastest growing sector in the superannuation industry and for this reason, advisers need to be able to advise clients on the role of a SMSF trustee and its related responsibilities and liabilities. In the current climate of regulation, advisers need to carefully consider the benefits for their clients in acting as trustee of their own SMSF, in particular, clients who are elderly or are time poor.

Elderly clients would seem the most obvious choice for retiring as trustee and appointing an approved trustee. As all clients move into the retirement phase of their lives, over time, their ability to properly discharge their trustee responsibilities may diminish. In these circumstances, with the client remaining as trustee, the risk of inadvertently jeopardising the complying status of the fund is greatly increased.

Retirement is an important time for clients. It is important that advisers remain pro-active in reducing unnecessary risks for their clients. In the case of a SMSF, advising an elderly client to retire from acting as trustee would seem wise and allow all parties to rely upon an approved trustee to assist in the management of the SMSF.

On an estate planning front, the appointment of an approved trustee allows a client and their adviser to feel comfortable that the estate will be managed professionally upon the death of the client.

The ability for the client to ‘rule from the grave’ allows an adviser to structure an effective estate plan for their client, secure in the knowledge that an approved trustee will be responsible for its implementation.

The appointment of an approved trustee also allows for a SMSF to continue across generations and not simply collapse upon the death of a fund member.

For example, a common fund structure is where you have a husband and wife as members and trustees of the SMSF. Using this example, let’s assume that both members have retired and are receiving an income stream from the fund. Let’s now assume that the husband passes away before the wife.

Upon the husband’s death, the wife will become the sole member and trustee, and effectively be solely responsible for discharging the trustee responsibilities for the fund. Given the onerous responsibilities upon a trustee in paying out a death benefit, the wife now has a significant duty, particularly if other members of the family decide to contest the payment.

Alternatively, with an approved trustee as the trustee of the fund, they would handle the process and payment of the death benefit and if applicable, facilitate the payment of income streams to the children, who could then become members of the fund.

Death is a very difficult time for all parties. Where a SMSF is involved, there are a lot of compliance issues that need addressing. And in most cases, the adviser will be pulled into the equation to try and arrange for the death benefit to be paid out in the most effective way. Expertise in the payment of death benefits cannot be underestimated. For these reasons, it is important the adviser seeks a stress-free solution for their clients and themselves.

Time poor clients is the second main area where clients are acting as trustee but are too busy to take their role as trustee seriously. Advisers can readily identify these clients. The client is generally an executive or a small business operator who has established a SMSF without consideration of the trustee’s responsibilities. In these circumstances, the adviser will feel uneasy that the client is acting as trustee oblivious to their trustee responsibilities.

An adviser’s concern should also be triggered by the fact that SMSF members do not have access to the culpability test, while they remain as trustee. Without the comfort of the culpability test, which essentially allows one party to apportion liability to another party, all members are jointly and severally liable for all breaches, even if they were not directly responsible for the breach occurring.

For advisers, it is important to stress to clients that the role of a SMSF trustee is similar to the role of a director of a company, and if the client can’t discharge their duties, then they should be removed from the position before they expose themselves. If the adviser is not pro-active and fails to raise his or her concerns with the client about them acting as trustee, then they could potentially be drawn into the contravention.

In a majority of cases, these types of clients are more than happy to retire as trustee once their exposure is fully explained. They are not interested in exposing themselves to time consuming compliance responsibilities and are far more interested in the investments or flexible pension options that the fund offers them. In addition, these clients’ SMSFs will typically be sizeable funds and the risk of losing half of it to the Australian Taxation Office is sufficient to convince them of the merits of retiring as trustee.

In summary, careful consideration is required by all advisers of the actual benefits to their clients in acting as the trustee of their SMSFs. In particular, where the client is elderly or time poor, the risks of acting as trustee are multiplied. By appointing an approved trustee, all risk and liability will be removed from the client and it will allow the adviser more time to concentrate on adding value to their client’s fund portfolio.

Ben Smythe is the managing director of Australian Superannuation Nominees.