Why your SMSF should have a corporate trustee

It is considered best practice to establish a self-managed super fund (SMSF) with a company acting as trustee, yet around 70% of the 488,000 SMSF’s in existence have individual trustees.

Why? The reason is simple; cost.

Establishing a SMSF with a corporate trustee typically adds more than $1,000 to the setup cost compared to establishing a Fund with individual trustees. Therefore, it’s reasonable to conclude that the decision not to employ a corporate trustee is made on the basis of cost alone because, in most cases, the long-term benefits of a corporate trustee outweigh the upfront cost.

Here are three benefits of establishing your SMSF with a corporate trustee:

Continuity

Most SMSF’s consist of two or more members with the most common scenario being spouses in a two-member fund. Using this scenario as an example, it is more likely that one spouse will predecease the other (rather than both spousing passing away together). This creates a number of considerations where individual trustees are in place. Under trust law, an SMSF cannot exist with a single individual trustee. This means that the surviving spouse would need to either find a replacement trustee (and introducing new people into the Fund gives rise to a whole new set of considerations so advice would need to be obtained first), or establish a corporate trustee instead (and incur the expense for doing so). Regardless, legal fees will be incurred as a Deed of Appointment will need to be prepared to retire the outgoing trustee and appointment the replacement trustee.

Another primary consideration is the change in asset ownership where a spouse (who is one of two individual trustees) passes away. Upon death, ownership of Fund assets will transfer to the surviving spouse (i.e. the remaining individual trustee). This means all investment providers will need to be notified of the ownership change (e.g. share registries, managed fund providers), bank accounts will need to be closed and re-opened in the surviving trustees’ name and where property is owned, the title will need to be changed. Additionally, some assets, such as property, may trigger stamp duty when ownership changes between parties in which case the SMSF would bear the cost.

In summary, where a trustee passes away and individual trustees are in place, it can be a costly and time-consuming process to keep the SMSF going.

However, these issues can be avoided by employing a corporate trustee upon establishing your SMSF (note that both spouses are required to be joint directors of the trustee company). This is because the company does not change where a director passes away (i.e. it continues). Because of this, there is no change in ownership of Fund assets and the surviving spouse/director is not required to bring in a replacement director because the rules allow a corporate trustee to exist with a single director. In plain terms, the SMSF is able to continue ‘as is’.

Asset Protection

If your SMSF is subject to litigation and individual trustees are in place, all assets owned by the individual trustees (e.g. family home) would be exposed to a claim. A classic example is where tenants in a rental property held by an SMSF sue the trustees for personal liability.

Where a corporate trustee is in place, any claim arising from litigation is generally limited to the assets of the corporate trustee. This means the claim would generally be limited to the assets within the Fund and not extend to assets that are personally-owned by Fund members.

Borrowing Money

SMSF’s have been able to borrow money since 2007, but lenders typically require a corporate trustee to be in place for the Fund to qualify for the loan.

Therefore, if you want to implement a Limited Recourse Borrowing Arrangement (LRBA) using a bank loan to fund the purchase of either residential or commercial property in your SMSF, your Fund will need a corporate trustee.

While you should obtain advice from a SMSF specialist before establishing a new SMSF or changing your existing trustee structure, in the majority of cases, the additional cost of a corporate trustee over individual trustees is worthwhile in the long run.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.