I have been busy travelling Australia and connecting with accountants and financial planners far and wide and discussing strategic issues, business opportunities, bloodline trusts and SMSFs, Family SMSFs and a whole lot of case studies.
Time and again I am hearing horror stories of SMSF estate planning disputes that have legal fees in excess of $100,000 to settle disputes between blended families or even within the same family. One case involved a male who died as the sole member of the Fund. He died leaving a wife, two children, a girlfriend who met the definition of spouse under the SIS Act 93, an SMSF with $2M, a corporate trustee, no SMSF Will or BDBN, his two bloodline children as executors and a whole lot of heartache. But the best was yet to come.
As can be expected both the wife and the girlfriend/spouse retained counsel to get their fair share of the SMSF estate. After more than a year’s intense legal wrangling and $150,000 in legal fees the deceased’s SMSF benefits were split 70% to the wife and 30% to the de facto.
Of course, not everyone was happy except the lawyers who had their bottom lines boosted significantly. But it made my blood boil for two reasons.
First is that the SMSF’s accountants did not consider any succession planning for the fund. Naturally, if a fund has only one member and that member dies there are going to be fights. Even with a strong binding death benefit nomination (which are as weak as water) or a safe, secure and certain SMSF Will, there are still major problems.
Lesson One for all you reading this. There is more than $295 Billion of SMSF death benefits to be paid in the next 20 years. Do not let SMSFs ever get to single member funds. It will cost you professionally and personally. Have a read of the November issue of the self-managed super magazine where I explain how an adviser, accountant, lawyer and/or financial planner can be sued, easily and effectively for making an SMSF estate planning mistake. Particularly where there is no SMSF succession plan.
Roll on Family SMSFs, even just to prevent the dire and unjust happening.
The second and most important reason that this case made my blood boil is that the Fund died with one member and a corporate Trustee. When the member died, there should have been a process in place for the appointment of another director, that is, the deceased member’s Executor ideally. However as there were no other directors to appoint the deceased’s Executor, as allowed under the SIS Act 93, the appointment was at the hands of the shareholders of the Fund. Now this is a matter for the Executor who, depending on the deceased’s will, can transfer the shares and the effective power of the Fund to a beneficiary of the estate.
Now this is where I know things got stuffed up. First, if I was consulting the children acting as Executors, I would have advised them immediately to transfer the shares, hold a shareholder’s meeting under the constitution and appoint themselves as directors. This meets both the SIS Act 93 and also the Corporations Act 20001. So far so good.
One thing is, the appointment of directors has to happen quickly as the Fund can only go rudderless for a short period of time before it may be said that it does not really have a Trustee at all. Again, another reason for Family SMSFs or at least some basic succession planning.
The next step is the distribution of the SMSF estate. As long as they followed the deed in terms of the payment of superannuation death benefits, then they could pay the death benefits to their mother and themselves leaving the girlfriend penniless. There is no legal argument or question over that.
The only legal redress for the girlfriend/spouse’s lawyer would be to challenge the transfer of the corporate trustee shares to the children. But I doubt that they would understand that.
So what really happened in this case.
Well I don’t have the complete details but the way I bet, the Executors were not appointed as shareholders and then directors. My guess is that the lawyers simply fought and fought until everyone was exhausted and agreed that the transfer of monies from the Fund’s bank account should follow a 70/30 spilt. Now, here’s the funny thing, I bet my bottom dollar that the transfer of monies was not in accordance with the deed, nor was there a proper appointment of trustees or appointment of directors as required. If there was, it would not be a 70/30 split by the aggrieved children who I understand were shocked that Dad had another family!
So it means that the superannuation benefits were stolen. Simple as that and if it ever came down to that and a challenge made to the lawyer’s role in all of this, then section 218 of the SIS Act 93 would recover their fees plus damages and section 202, potentially see them charged with a Commonwealth crime with a term of imprisonment no greater than five years.
So the moral of this story?
Succession planning in ALL SMSFs should be high on your priority list and if you come across an SMSF estate planning horror story or one in the making, get good SMSF advice and don’t rely on estate planning lawyers with no SMSF expertise.