Why you should have a Corporate Trustee for your SMSF?
The time to make a decision regarding who the trustee of your SMSF should be is:
- when commencing an SMSF;
- when reviewing the trust deed for amendment;
- when certain investments are considered for purchase (ie property);
- when estate planning needs are addressed; or
- any other appropriate time.
Most advisers would recommend a corporate trustee at any of these stages, but it is a decision that must be made by those who will be either the individual trustees or the directors of the corporate trustee.
Many decide on individual trustees as it is less costly initially. However, the need to change the holding name of all investments whenever a member joins or leaves the fund can be time-consuming and costly. It could also exacerbate the stress felt when dealing with a deceased estate.
When a corporate trustee is in place, the only change that is needed is the removal and appointment of individuals as directors, which is far less problematic.
Another consideration when making a decision regarding trusteeship is the ability of an SMSF to pay benefits. An SMSF with individual trustees can only pay benefits to their members as old age pensions. An SMSF with a corporate trustee have the additional ability to make lump sum payments. This is often overlooked as members with full access to their benefits have no restrictions as to the amount they can withdraw as a pension payment. However, it does prevent a member from receiving in-specie payments, such as the transfer of property or other assets in lieu of payment. As pensions must be paid in cash, these will be lump sum payments.
In the scenario where married couples are the members and individual trustees of their SMSFs, it would be necessary upon the death of one of those members for either a corporate trustee to be appointed, or for another individual to be appointed as a trustee. Initially it may appear much simpler to appoint a child (for instance) as the additional trustee. However, it could cause friction between siblings and, worse, between the parent and child as the child would have to approve and sign off on investment decisions. This is something in which the parent may not wish to involve their children. Problems could also occur if the child lives interstate or some distance away, as this would cause delays in getting documents signed for investment and compliance purposes.
Other advantages of having a corporate trustee are:
- When an SMSF has a corporate trustee, there is a clear separation of assets. There is therefore no risk that the SMSF assets could get mixed up with individual assets in the event of a law suit. It is unlikely that a claimant would succeed if it can be shown that the assets indeed belong to the SMSF, but the legal costs could be hefty.
- Where an SMSF is invested in property, it exposes the trustee to the risk of being held liable for any damages suffered by anyone who meets with some misfortune while on the premises. For example, where the individual trustees of an SMSF are held personally liable for the injury sustained by a tradesman while performing maintenance work on site.
It is for all the reasons above that we recommend all SMSFs put in place a corporate trustee. If you have any questions, please contact our office.