Self-managed super funds (SMSFs) revolve around family members which can make them extremely vulnerable to disputes that arise when SMSF members clash over money.
In the worst case scenarios, the cost of a dispute can leave the fund and its members with nothing because trustees have vested interests, established duties and legal responsibilities to the fund that can result in severe penalties if breached.
Some of the most common disputes arise over disagreements:
- Over investments and the investment strategy, especially between siblings who are members and trustees of a fund;
- Over the payment of benefits. An example is a fund where the parents already receive pensions. The dispute could be over the investments which should be used or acquired to support the payment of pensions versus the investments to support the different objectives of children with longer investment time frames;
- Over the payment of death benefits. In one case, a daughter disagreed with her father’s wish to split his death benefit equally between herself and her brother. She used her powers as a trustee to pay it all to herself; and
- Between surviving family members arising from the payment of SMSF death benefits compared with amounts received under the deceased’s will.
Disputes are unpleasant and expensive. How long they are drawn out will depend on how well the provisions in the SMSF trust deed deal with trustee disputes. If they don’t, the trustees must act unanimously which can result in deadlocks and an expensive trip to the courts for resolution.
That situation can occur because the fund has two to four trustees. If the fund has three members, two can outvote one. But a single member, like a corporate trusteeship, will have no disagreements, making a single-member SMSF the safest fund of choice. It is one solution to avoiding having a two to four member fund where an even vote is more likely to occur.
Other ways to avoid, or lessen the impact of disputes, include drafting the SMSF trustee deed to have dispute minimising provisions such as:
- Allowing trustee decisions to be made by a simple majority rather than unanimously;
- Providing a casting vote to a particular trustee in case an even vote or deadlock occurs;
- Ensuring that voting rights are based on the value of a trustee/member’s account balance within the fund. This eliminates a member with minority interest outvoting a member with a large fund account balance; and
- If there is a corporate trustee, ensuring that similar provisions are contained in the constitution regarding decision making by the directors.