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SMSF Trust Deeds - not as "set and forget" as you'd like

Not all SMSF Trust Deeds are created equal - so how does yours stack up?

An article in the AFR yesterday on the importance of having, and understanding, a well drafted SMSF Trust Deed prompts the question - how does yours stack up?

You can read the full article here but the message has been touted a hundred times - have a current deed !!

SMSF governing rules are typically found in the Deed which established the Fund along with any Deeds of Variation.

The Deed is the primary instrument in respect of a SMSF because it determines what the SMSF trustee of the Fund may or may not do with Fund assets. In our view, it is important that the Deed provides a wide range of powers to the trustee in order that advantage may be taken of what is permitted under superannuation law.

We have seen examples where the Deed only allows payment of death benefits to certain dependents, restricting the trustee as to whom death benefits may be paid to, in contradiction of legislation providing that death benefits may be paid to any of the dependents of the deceased (or the legal personal representative of the deceased). Therefore, the member may not be able to achieve the estate planning outcome expected.

Binding Nominations can be an effective estate planning tool to assist with ensuring that the trustees discretion is fettered and that death benefits are paid in accordance with the members wishes. However not all Trust Deeds allow such nominations. Similarly, with the growth in SMSF borrowing to purchase, trustees should ensure that the power to do so is contained within the Deed.

We spoke to Geoff Saffer, Senior Investment Strategist at Elite Wealth and winner of the Australian Stockbrokers Foundation's Best Stock Picker Award 2015, about the challenges faced in investing a Fund governed by a poorly drafted Trust Deed.

"Each investment strategy must align with the Trust Deed. If not carefully drafted, the investment strategy may conflict with, and be overridden by, the rules in the Trust Deed. Geoff advised.

When commenting on the need for a well drafted Deed, Geoff said "Investors need to pay close attention to the document to ensure they aren't breaching any restriction on investment activity. The easiest way for a Trustee to avoid being tripped up by their investment strategy, is to ensure that the permissible classes of investment in the Deed are as inclusive as possible. When establishing your investment strategy, list any investment class that you could conceivably invest in. As an example, if you think there is a small chance that your fund will invest in bonds or options, include those classes. That way, if and when you decide to invest in them, the investment strategy will permit you to do so. Importantly, I reiterate that the investment strategy must align with the rules of the Fund which are contained in the SMSF Deed."

"Trustees should ensure that their Trust Deed is flexible enough to ensure they are not caught out down the track." Geoff added.

So while we (and the rest of the industry) recommend maintaining a current deed, the complexity of the drafting, and understanding that drafting is also imperative to the ongoing management of the Fund.

For more information on the potential pitfalls of SMSF establishment and management, contact David Patkin.

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