A Member may appoint a Guardian by Deed so that upon the death of the Member the Guardian will police the payment of the Member’s death benefits to their intended recipients and will have the casting vote in relation to those payments and any matters pertaining to their payment. This is very beneficial for blended families (multiple marriages families), or families in which there are special needs recipients (recipients requiring special overseeing of their affairs due to e.g. financial irresponsibility or substance abuse), to ensure that the death benefits are paid to the surviving spouse/partner and then on in favour of the bloodline.
Rule 26 of the Smarter SMSF trust deed of the fund permits a member to appoint an individual as that member’s “Fund Guardian” for the purposes of the payment of the member’s benefits and the management of their superannuation interest(s) held in the fund.
What is the purpose of a Fund Guardian?
The role of the Fund Guardian is to participate in the management of a member’s superannuation interest(s), most likely in circumstances where the member suffers a legal incapacity or upon the death of the member.
Essentially, the appointment of a Fund Guardian is designed to add an extra layer of protection of the member’s benefits potentially from abuse or mismanagement by other member trustees or directors of the corporate trustee. This protection arises because a trustee cannot exercise any powers conferred upon it or them in accordance with the provisions of the deed that relate specifically to the member affected without the Guardian’s prior written consent.
This is broadly drafted into the provisions of Rule 26.3 of the Deed and can include:
- trustee decisions relating to the payment of death benefits;
- trustee decisions relating to the commutation, rollover or transfer of the members benefits for any purpose;
- investment decisions of the fund that impact on a member’s superannuation interests.
Effectively, the Fund Guardian can fetter or bind a trustee and any decision of the trustee that has any impact on a member who has appointed a Fund Guardian.
In what circumstances would a Fund Guardian be appointed?
A Fund Guardian does not practically usurp a member’s power however their appointment does require the trustee to obtain their consent to any decisions affecting the member (including the member them self if they are legally capable), but the member has the power and ability to revoke a guardian’s appointment at any time.
A Fund Guardian is can be appointed in a range of scenarios including:
- When a member establishes a Conditional Pension; or
- Where the member wants the Guardian to oversee decisions alongside their appointed Enduring Power of Attorney.
Establishment of a Conditional Pension
A member can establish a Conditional Pension in accordance with Rule 25 of the fund’s deed, which is designed to help protect the capital of their superannuation benefits upon death and to pay out a restricted death benefit income stream to a spouse (tax dependant beneficiary and member).
Upon the spouse’s death, the capital is directed to be paid to the estate or beneficiaries from the primary member’s previous relationship (e.g. children from former marriage). In these circumstances, the Fund Guardian’s role is to police and manage compliance with the terms of the Conditional Pension Deed during the period that the restricted pension income stream is in operation and to ensure that the surviving spouse/partner member does not make any decisions that may adversely impact on the deceased member’s death benefits without the consent of the Fund Guardian.
Overseeing decisions within the Fund
If the member is concerned that if they lose capacity and are removed as trustee of the fund and replaced by their Enduring Power of Attorney (EPA), they may want to ensure that any decisions made by their EPA and any other trustee/directors are made with the consent of the Fund Guardian to ensure that their interests are best protected. While a member can make an SMSF Living Will to make more prescriptive rules relating to their benefits during a period of incapacity, they may not want to go down this route but to appoint a Fund Guardian allowing more flexibility in decision-making based on the discretion of the Guardian.
For the reasons described above, a member may want to have a professional person play a part in monitoring their superannuation interests during a period of their incapacity or upon their death. However, a professional person such as an accountant, financial planner or lawyer could not otherwise play any part in the management of the fund without being a member and trustee but are prevented from receiving any remuneration because of the operation of section 17A (2)(c) of the SISA.
The appointment of the Fund Guardian would permit a professional person to have an effective supervisory role in the management of a member’s benefits and to be remunerated for it without being a professional trustee. This can have significant benefit where there is conflict amongst the fund trustees or any replacement or substitute trustee that may arise from member’s incapacity (step child EPA) or where any particular trustee lacks the financial skill necessary to capably manage the investments of the fund.
How is a Fund Guardian appointed and revoked?
Rule 26 specifies that a Fund Guardian is appointed by a Deed of Appointment made in writing signed by both the member nominating the Fund Guardian and the Guardian. The Deed of Appointment can specify the terms and conditions of the Fund Guardian’s appointment if required. Otherwise the Fund Guardian can be appointed by a Conditional Pension Deed made in accordance with rule 25.8. The Deed also permits the Guardian to be a member of the fund.
As indicated, a member may revoke a fund Guardian at any time by delivering a written notice of revocation of the Fund Guardian.
Because the Fund Guardian’s role can be variously described, and their powers determined, it is important to ensure that their function and office is made in consideration of the client’s individual needs and circumstances, the different investment decisions that need to be made in relation to the fund and any existing death benefit nomination and SMSF Living Will.
Case study – Role of the Fund Member’s Guardian
Tim and Kate are trustees and members of their SMSF. Both have been previously married with two children from their prior marriages. Each member is currently drawing income streams from their SMSF to support their ongoing living requirements, with the pensions reverting to each other in the event of their death. Tim also has an accumulation account as a result of complying with the transfer balance cap (limited to $1.6m in the retirement phase).
It was mutually agreed between Tim and Kate that the surviving beneficiary will receive the deceased’s income stream and upon the survivor’s death the benefit will be split equally amongst all the children (i.e. 25% each). A binding death benefit nomination (BDBN) is also in place that directs any accumulation interests (amounts not subject to automatic reversion of the income stream) to be paid to the surviving spouse.
A few years later, Tim’s health declines and subsequently passes away. Tim’s pension automatically reverts to Kate and the BDBN instructs the accumulation benefits to be paid to Kate. The combined value of the pensions means that Kate must ‘cash’ the death benefit as a lump sum (out of the super fund).
As a result of these changes, Kate seeks advice regarding the excessive pensions (as above her transfer balance cap of $1.6m) and the trustee structure of the fund, as she is now the sole member and trustee. Within the six-month timeframe to continue to operate as a SMSF, she appoints her son, Toby as the second individual trustee.
Progressing forward a few years, Kate passes away. The original BDBN prescribed no stepped nomination that dealt with paying benefits to Kate’s estate or equally to the four children in the event that Kate survived Tim.
As the remaining trustee, Toby decides he would collude with his sister Jenny (appointed as trustee) and not pay any benefits to Tim’s two (now adult) children as they never really saw eye-to-eye.
Tim’s two children were ‘step-children’ of Kate only until the time of Tim’s death. As a result, they would not meet the definition of a child for superannuation law (SIS) purposes. As adults, they are also unlikely to qualify under an alternate definition such as financial dependency. Even where a BDBN was to direct payment to them, this would be invalid as they are not SIS dependants. Any direction should have been provided via the Legal Personal Representative (LPR) to direct the payment of the death benefit to Kate’s estate to deal with the benefits in accordance with her Will.
The role of the Fund Member’s Guardian
Where Tim and Kate looked to appoint a Fund Member’s Guardian, it would ensure that any death benefit payment to be made would need to be approved by the Guardian. In this instance, the Guardian would be aware of the decisions between Tim & Kate to split the remaining benefit equally amongst the four children. The Guardian could therefore veto any direction by Toby and Jenny to pay benefits directly to themselves and ensure that the death benefit will only be approved for payment by the Guardian where it is directed to Kate’s estate.
As a result, the role of the Fund Member’s Guardian has ensured that the death benefit is dealt with correctly and provided an important safeguard around the proposed inequality of the distribution of the benefits.
Fund Member Guardian – Deed of Appointment
You can purchase the Fund Member Guardian documentation from the Smarter platform as part of the Create Legal subscription, or alternatively on a pay-as-you-go (PAYG) basis.
Register for the upcoming webinar
You can register for the upcoming webinar on 13 September 2018 where Aaron Dunn and Chris Hill (Hill Legal) will be discussing the opportunities for professionals in utilising the Fund Member Guardian role with your SMSF clients