Managing complex relationships in SMSFs comes down to well-crafted deeds

Marriage breakdowns and SMSFs are tricky and expensive, but if the fund has extended family members included it can get even trickier, says the head of a national SMSF advice company.

 
 

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Aaron Dunn, CEO and founder of Smarter SMSF, said on the latest SMSF Adviser podcast that it’s not uncommon to see SMSFs set up with siblings or business partners for which the law does not provide any mechanism for individuals to unpack and depart in the event of a dispute.

“There are mechanisms within the superannuation law and Family Law Act that deal with marital breakdown even though that can still become quite tricky,” he said.

“When a dispute arises, and one party is accusing another and that party is accusing the other person, they’re in a fairly expensive battle to try and resolve a pathway out.

 

“But the fact is, the regulations require someone to provide consent to be able to leave. You can’t boot someone out or they can’t say they want to leave and absolve all their responsibilities.

“What you have to always remember with an SMSF is when you come into the fund, for the large part, you are equally a member and a trustee or director, so you have responsibilities that you need to adhere to as well.”

Mr Dunn said when establishing an SMSF with either extended family or business partners, consideration should be given to including some type of conditional-based membership.

“You can put in place a condition that would, in essence, say to the person that’s coming in, you accept and acknowledge that they will do the right thing, or they will no longer be there,” he said.

“But by and large, that doesn’t exist, and therefore, navigating a pathway out becomes a hell of a lot trickier than it would in a husband-and-wife situation where you can go down the various ways of separation agreements and court orders.”

Marriage breakdowns and the splitting of an SMSF and assets in general is a fairly common occurrence, he said, and although it can be done, there can still be problems that arise.

However, if the SMSF also includes siblings or business partners, those problems become more complex.

“One of the things which I often talk about is documentation and my understanding is that if something is in the deed [to cover a situation like this], it makes it a lot easier,” he said.

“But it has to be done in the deed. This is something that we’re getting better at as an industry, but if we have a corporate trustee, we’re not only needing to consider the deed, but we’ve got to consider the company.

“The constitution that governs that is very different. Quite often, I come across scenarios where there’s an inconsistency because we might have had upgrades to the deed, but the requirements of the constitution are very different.

“Therefore, the actions that you thought might have been happening in the deed are irrelevant because of the corporate trustee structure.

“So, we’re looking at shareholders and directors as opposed to individual trustees.”

Mr Dunn said it’s imperative that the deed is always kept up to date and advisers start from an outcomes basis and manage all the risks for their clients.

“Where relevant, you might need to tailor parts of the documentation, and I use that term quite broadly, to ensure that you manage the risks of those relationships that might exist within the fund above and beyond a normal husband and wife or partner situation,” he said.

“Because when they seem to blow up, they usually blow up pretty hard, and it gets very, very ugly.”

 

 

 

 

Keeli Cambourne
29 August 2023
smsfadviser.com

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Sofie Korac is an Authorised Representative (No. 400164) of Prudentia Financial Planning Pty Ltd, AFSL 544118 and a member of the Association of Financial Advisers.

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