Having a leading member in your SMSF creates a clear line of succession.
Most SMSFs in Australia lack clear lines of succession. The concept of the leading member is to rectify this and avoid the shortcomings of a binding death benefit nomination.
Grant Abbott of LightYear Docs and I love SMSF invented this concept, so perfect to ask for more details. Here is what we learned but please listen in as Grant explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
The British royal family has a clear line of succession. No matter what happens, there are clear rules about who bears the crown.
Now compare this to the typical SMSF in Australia. There is no clear line of succession. There is no line at all. Many trust deeds don’t even cover incapacity.
So the concept of the leading member is to fix this. One person – the leading member – holds all the strings and when this person dies or becomes incapacitated, then the next person becomes the leading member within a clear line of succession.
The concept is to avoid a stalemate between members and create a clear line of succession.
The leading member controls the fund. They have the power to hire or fire trustees and appoint or remove members. They can veto most decisions within the SMSF. And when they become incapacitated or die, this power passes on to the next line in succession.
Enduring Power of Attorney
All members of an SMSF have to be trustees or directors of the corporate trustee. And so all members have some control over the SMSF. That is the general rule.
But members can give an enduring power of attorney to somebody else, including another member. And this other member – as their attorney – will then step into their shoes as trustee or trustee director.
If all other members give a power of attorney to one specific member, this one member becomes the leading member, being the only nominated trustee or director of the corporate trustee.
To adopt the concept of a leading member, you need to outline this concept in the SMSF’s trust deed. If the SMSF already has a trust deed, you need to amend the deed and adopt a new version that includes this concept.
To avoid an abuse of power, you set up a living will. Living wills are popular in the US and Canada. It is like a contract between the trustee of the fund – in this instance the leading member – and a member. The contract stipulates to provide the member with a certain income stream and/or certain benefits. These benefits could include the payment of health care expenses and a certain standard of living (e.g. a 5 star nursing home). The contract becomes a part of the governing rules of the fund.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 18 December 2019