An SMSF trustee decision for the long, long haul

It is a decision
that could have financial and personal implications for as long as the SMSF
remains in existence including when a member leaves the fund and/or a new
member joins.

Indeed, some SMSF
members would not fully recognise the key differences between having individual
trustees or a corporate trustee until a member dies. Of course, this
consideration is particularly pertinent given the ageing of the population.

Under
superannuation law, all members of an SMSF must be either individual trustees
or directors of a corporate trustee of the fund. An SMSF with individual
trustees must have at least two individual trustees yet a corporate trustee can
have only one director.

The tax office’s
latest-available SMSF annual statistical review records that 92 per cent of the SMSFs established in 2013-14 had
individual trustees – a rise of two per cent over three years.

As the tax office
observes, “there has been a consistent shift away from corporate
trustees”. This could partly be attributable to some investors focusing on
what may seem the easiest and most hassle-free way to setup an SMSF – perhaps
without weighing-up the long-term differences between the two types of
trusteeships.

Others planning an
SMSF would no doubt carefully compare the features of each type of trustee –
perhaps in consultation with their financial planners – and then choose the
best perceived course for their circumstances.

Interestingly, 77
per cent of SMSFs in existence on 30 June 2014 had individual trustees. In
other words, 33 per cent have corporate trustees against 8 per cent for new
SMSFs.

A proportion of
SMSFs would have begun with individual trustees and later switched to a
corporate trustee, perhaps after the death of a member.

The tax office, as
regulator of self-managed super, urges would-be SMSF members to understand the
differences between the two types of trustees. It could be worthwhile gaining
advice about the issue from an SMSF specialist.

On one hand,
individual trustees – with each member acting as a trustee – can cost less to
establish because a company is not setup to act as a trustee. However, the ATO
points out that there are other considerations apart from initial cost.

An SMSF with
individual trustees must hold its assets in the name of all those individuals
as trustees of the fund. If an individual trustee is replaced, the names on the
funds’ ownership documents must also change. “This can be costly and time
consuming,” the tax office warns.

By contrast with a
corporate trustee, assets are held in the name of a company as trustee. If
trustee directors change, the assets remain in the name of the same company.

If a fund has two
individual trustees and one dies, the fund must appoint another trustee to
continue as an SMSF. (This is because of the requirement that a fund must have
at least two individual trustees.) Yet if an SMSF has a corporate trustee, a
deceased trustee director may not have to be replaced because a corporate
trustee can have a single director.

In other words, a
corporate trustee will continue to control an SMSF and its assets after the
death or incapacity of a member.

To find out more
about establishing an SMSF or to discuss your current SMSF trusteeship, speak
with your financial planner.

Source: Vanguard