There is no doubt that setting up an SMSF with individual trustees continues to be the most popular choice. It is cheaper and less effort but it has the potential to set up the trustees for unnecessary risk, unwanted hassle and avoidable stress if / when an unfortunate event occurs. And such an event could occur two decades later, at a time when the clients are well into retirement.
It is encouraging to see the tide turning as the regulators appear to be taking a more active role in discouraging this practice. As an advisor, I strongly encourage clients to use or continue to use the corporate trustee structure. It’s a small price to pay for ongoing protection and peace of mind.
Whilst there other advantages, I have highlighted the three (3) that, given the right circumstances, have the potential to unleash financial disaster.
Limited liability for trustee directors
The last thing you want is your personal assets (for example, your house) at risk when you are retired. When an individual acts as an SMSF trustee in his or her own name, it is akin to running a business as a sole trader. All of the individual’s personal assets are on the line. Also, in certain circumstances SMSF trustees can be sued. This risk is higher when the fund owns property or takes on debt.
Using a company as the trustee of an SMSF, where all members are company directors, means an added layer of protection for the individuals personally. Any legal stoush will be generally limited to the fund’s assets and, unless personal guarantees are in place, is unlikely to involve members’ personal assets.
Certainty of trustee succession
I’ll explain using a common example. In the event of a member’s death (and everyone dies eventually) where only one individual trustee remains, the SMSF can’t carry on. A second trustee must be appointed.
Depending on who this person is, there is a risk that the ‘shared vision’ decision-making process that typically prevails up to the day of death could change dramatically. How could this happen?
Just think about lack of proper estate planning combined with divorce, remarriage, a blended family, a nasty in-law, a spendthrift child or a child with a gambling or drug addiction! You can see how your lifetime of work could be misdirected.
On the other hand, a sole director of a corporate trustee can carry on alone in the event of a member’s death with continuing certainty in decision making for the surviving spouse.
Definitive separation of SMSF assets
Again, this is a risk issue. It lessens the risks associated with mixing SMSF assets with personal and business assets. A corporate trustee structure provides a clear line of separation between SMSF assets and members’ personal assets. It also demonstrates this separation to regulators. It is also a practical protection in the event of personal bankruptcy of a member. The corporate trustee structure can help protect fund assets from receivers.
If you can’t afford a company to act as the trustee of your SMSF, I would question whether you should be taking on the trustee role at all. After all, it is your responsibility to think beyond your own needs and consider the needs of other members (your family) and to act prudently to protect them.