I’m not a huge fan of scaremongering around trust deeds.
That doesn’t mean I don’t think it’s an important document – it absolutely is. A solid trust deed can make a world of difference when it comes to acting quickly to respond to legislative change, having your estate planning put into effect exactly as you intend, minimising friction when setting up a loan for a Limited Recourse Borrowing, minimising the chance that poor process by the trustee or administrator or adviser will result in a bad outcome when it comes to disputes. And much more.
I just think that as a general rule, they should be written so that they don’t need to be updated all the time – a good deed should last 5 years as a general rule and we generally recommend a review to our clients after that time rather than every year.
Right now, though, we are recommending an upgrade for all clients within our practice – for the first time in 10 years. It’s no surprise that this is happening at the same time as the major changes to superannuation become law and SMSF practitioners and trustees are getting ready for the big changeover on 1 July 2017. Here are just five reasons why upgrading a trust deed now is likely to be a good idea:
- The new rules change the landscape around death benefit planning for everyone, particularly those with legacy pensions such as market linked and defined benefit income streams. Just one feature we’ve incorporated into our latest deed is the ability to add or remove a reversionary pension to an account-based pension without stopping the pension. This is going to become an increasingly important need as practitioners try to juggle the desire to restructure reversionary arrangements without affecting grandfathering treatment for benefits like the Commonwealth Seniors Health Card or social security income test;
- The new rules will require a lot of individuals to rollback “excess” amounts from their pension balances to accumulation phase of to remove the excess from super. In cases where money has been rolled back to accumulation phase, any reversionary pension arrangements will no longer apply and the member may wish to put a binding death benefit nomination in place. Is the current deed flexible to allow different account balances to be dealt with quite separately under a binding death benefit nomination? Is it crystal clear whether a reversionary pension trumps a binding death benefit nomination or not? (since this usually comes down to the deed);
- A fund’s ability to segregate its assets will change from 1 July 2017 for those with large balances. But this doesn’t change the trustee’s ability to allow members to “choose” specific investments to underpin their account – it just means that arrangement can’t be reflected in the fund’s tax return. Many deeds treat segregation and member investment choice as the same thing – ruling funds out of some valuable strategic planning opportunities;
- In the new environment it will be possible to rollover a death benefit without losing its “death benefit” status (although it will still have to be converted to a pension or cashed out as a lump sum in the new fund). This will be extremely useful where a key member has died, the spouse wishes to wind up the SMSF quickly but retain the money in a super pension – hence rolling it over to a retail or industry fund would be ideal. Certainly there are plenty of trust deeds that don’t allow that to happen;
- And conversely, where a member of a retail or industry fund has died, an SMSF may be the optimal retirement vehicle for the spouse’s pension. It will be important that the SMSF trust deed allows the new type of rollover to be received;
Upgrading a trust deed is generally a simple and relatively inexpensive matter. Right now, it’s not something to be deferred to another day.