What can be done when an SMSF trust deed contains a mistake or typo?

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What happens when there is an error in a Trust Deed?

We often get asked by our clients, what can be done when their SMSF Trust Deed contains a mistake or typo. Formalities are necessary and a deed of rectification may be the only effective way of fixing the problem.

A deed of rectification is a very important document that acts to clean up, what can occasionally be, a very big mess. It is a formal document that notes and corrects a mistake contained within a previous Trust Deed. The error could potentially be anything, but we find the most common errors are typos in relation to either the name of the fund or trust or the name of a member or beneficiary.

A deed of rectification is read in conjunction with your previous Trust Deed and therefore does not replace the previous deed.

A little mistake – a big problem

Let’s look at an example as to how a small error on your Trust Deed can cause a surprisingly nasty problem.

James and Tom are brothers. They are both trustees and members of an SMSF. James and Tom decide to purchase a property with their SMSF under a limited recourse borrowing arrangement, and are financing the loan with the bank.

James and Tom find a beautiful cottage on the mid-North Coast of New South Wales for a great price. James and Tom successfully negotiate a purchase price with the vendor and exchange on the property.

In the week prior to settlement, James and Tom receive an email from the bank, which has noticed that Tom’s middle name does not appear on the SMSF Trust Deed. They want the problem fixed.

If James and Tom do not act quickly, they may not be ready to settle on time. This is not only a stressful situation, it could be potentially costly.

The only way forward is a Deed of Rectification. That is because a deed is a formal and solemn form of document with many hundreds of years of history. It is very old law that the only way to amend such a formal and solemn document is with another similarly formal and solemn document – another deed; this time a Deed of Rectification.

Why should a rectification document be by deed?

You can’t get much more formal than a deed – that’s why!

Most third parties, (e.g. banks, auditors and the ATO) generally require rectification documentation to be in the most formal manner because only a deed can effectively amend another deed.

We prepare our rectification documentation in this way to ensure that the error contained within the previous Trust Deed won’t come back to bite our clients at any future time.

By Olivia Agosti, Solicitor

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