Investment Strategy

Is your trust deed holding you back?

By AMP Capital

Aside from the right trustee structure, there are lots of other boxes the fund’s trust deed needs to tick.

A self-managed super fund’s (SMSF’s) trust deed should drive everything the fund does. It should determine who can be trustees, how the fund is run and how it invests.

As the Australian Taxation Office (ATO) explains, you need trustees, assets and  beneficiaries to create a trust.

As it notes, “a trust deed is a legal document that sets out the rules for establishing and operating your fund. It includes such things as the fund’s objectives, who can be a member and whether benefits can be paid as a lump sum or income stream. The trust deed and super laws together form the fund’s governing rules.”

Under the ATO’s rules, someone qualified such as an accountant has to prepare the deed, it must be signed and dated by all trustees and properly executed. Plus, it needs to be regularly reviewed and updated.

Greg Newbury, a financial planner with Accru, explains the appointment of trustees is one of the most important aspects of an SMSF’s trust deed.

“Trustees can be either individual or a corporation. For most SMSFs, a corporate trustee is the best way to go. This helps with succession planning if the fund’s members change and in the case of the death or divorce of members,” he says.

As Newbury explains, a corporate trustee makes fund administration much more streamlined. If the fund has individual trustees, each time a member wishes to leave the fund, this may mean the fund has to change the name on the assets the fund owns.

But when the fund is set up in a corporate structure, the corporation owns the assets. So when a member dies or leaves the fund, the name in which the assets are held does not need to change. This makes it much simpler to run the fund.

Additional considerations

Aside from the right trustee structure, there are lots of other boxes the fund’s trust deed needs to tick.

The deed should set out who has the right to make contributions to the fund and how rollovers should be executed. It’s also where the fund’s investment strategy should be housed.

“When you’re setting up the trust deed and investment strategy it’s also an idea to keep in mind the preclusions in the SIS Act,” says Newbury. These include rules around related party transactions.

“It’s also important the trust deed outlines the fund members’ binding death nominations so the trustees transfer wealth the way they intend to, that’s one of the most important things,” new adds.

Avoiding errors

Taking actions not permitted in the trust deed are some of the most common mistakes SMSF trustees make.

For instance, trustees might enter into limited recourse borrowing arrangements when the trust deed doesn’t allow it.

“Most banks will pick up errors such as these when the trustees apply for a loan, but not in all cases,” says Newbury.

Another error happens when trustees move overseas for a period.

“If the trustees are overseas for more than two years the fund loses its compliant status. It’s possible to reset the fund’s status, but this is something to be aware of,” he adds.

It’s also critical to have an enduring power of attorney in place in case the fund’s members become incapacitated.

Binding nominations are another area that can trip up SMSF trustees.

Says Newbury: “During estate planning clients often assume their super fund forms part of their estate. But you need to make a binding death nomination to ensure your super funds end up where you intend them to go on your death.”

Reversionary pensions are another consideration when putting together your trust deed. The deed should indicate how these pensions should be treated on the death of the trustees.

Make sure the deed is put together by advisers, accountants and solicitors with long-term proven experience putting together SMSF trust deeds.

“Review the deed every time there are major regulatory changes and when something big happens in your life,” says Newbury.

“It’s also a good idea to ask a qualified SMSF auditor to review your deed so it meets the requirements of the law and also meets fund members’ needs,” he adds.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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