The Leading Member SMSF – the Next Great SMSF Advising Project

1. SMSFs are all about Innovation

SMSFs have always been about innovation. They started with innovation by the government of the day to provide a small, choice environment for small business and family to aggregate and pool their superannuation wealth. That one innovation has sparked a colossus that the larger industry and retail super funds try valiantly to break but with average balances in these large funds of $58,000 and in a SMSF, over $650,000 try as they might it’s not going to happen.
Since the advent of SMSFs in 1994 those original members have grown old and accumulated great wealth – the figures above do not lie. But being an older member has its virtues in terms of experience but also brings a whole lot of new issues, real day issues to the table including:

  • How do I preserve my wealth when the laws tell me to take more and more pension each year, when I actually need less and less?
  • What happens to my two member fund if I die or get dementia?
  • Will my money and wealth go outside of my bloodline?

From all the talks that I have had with SMSF trustees over the past few years, and particularly to the older group of trustees, it is what happens to my money when I die that is now sitting front of mind. The dread of hard earned wealth and money going outside of a family’s lineage or bloodline is hugely important to many well to do SMSF members.

Ask your 60+ age SMSF clients:

“Is it important for you to ensure that your superannuation wealth remains for your lineage and bloodline or be spread around to all and sundry?”

Yet here we are as an industry looking at our navels wondering whether a BDBN or reversionary pension should sit at the forefront of a client’s SMSF estate. Seriously! The cases show that many BDBNs have been held to be useless and reversionary pensions without great documentation even worse. Now that does not mean estate planning or testamentary trusts are any better. The number of challenges to estates and the excessive amounts of litigations costs to get them to a result is no solace for our clients. Our job as SMSF advisers is to solve and provide real solutions through innovation and understanding not look in the rear vision mirror. It is pretty hard to ride a charging horse looking backwards.

Here is my take on things. All of the issues above, the fear of monies going to a step-child of a son or daughter and not a grandchild – what happens to the fund if the member becomes demented – these things go to control. The fear of a loss or lack of control in a SMSF and for that matter, family trust, company or partnership and life scares even the strongest of characters. There has to be a solution and to me there is one, one that we can adopt and adapt to a SMSF and really any structure a client may be using.

That solution is a royal solution – made for the times and tested over the centuries, one that ensures, well guarantees control.

2. A Royal Solution

The Royal Solution starts with the current British Monarchy and its descendant bloodline. At its apex is the Leading Member of the Monarchy, Queen Elizabeth II. Next in line is not Prince Philip but Prince Charles if he is alive. If he is not, then Prince William becomes the Leading Member of the Monarchy. Where does that put Prince Charles brothers – Andrew and Edward? Well, they have their own pot of wealth but no control unless something unbelievable happens. But post Prince William? Well, the Leading Member of the British Monarchy will be George if he is alive.

This system of leading member control has certainly worked well for the British Monarchy and provided – security, safety and certainty. Now, this is where innovation, problem-solving and forward-thinking comes in. Why not create a Leading Member SMSF and while we are there, although it is not for this discussion, a Leading Member Discretionary Trust, Leading Member company, Leading Member bucket company and well you get the idea.

3. Who and what is a Leading Member SMSF?

“The mission of a Leading Member SMSF is to look after and provide for generations of the bloodline or designated beneficiaries of the originating Leading Member of a SMSF. It is the highest calling and turns an SMSF from a simple investment vehicle into a multi-dimensional environment to protect and grow the superannuation wealth and benefits of a family of members.”

An SMSF under section 17A of the SIS Act 93 consists of 6 members, all of whom must be directors of a corporate trustee UNLESS a member holds another member’s EPOA with specific instructions that it is for superannuation trustee purposes. In this case, the member can remain as a member even though they are not a trustee or director of the Fund’s corporate trustee. If you want to know more the Commissioner has written a great ruling on it – even enabling an accountant to control a Fund for overseas members (non-trustees) – SMSFR 2010/2.

For me, the person, who holds power and sway in this style of fund is the Leading Member of the Fund.

So, who is the Leading Member?

The Leading Member is the person who controls the Fund much like an Appointor in a discretionary trust or closer to home, an employer in an old school employer superannuation fund, who has the ability to appoint and remove the trustee and also members of the fund. In a Leading Member SMSF one person or a couple may be appointed as Leading Members. This can be from the establishment phase or if an ordinary SMSF is to be upgraded to a Leading Member SMSF, part of the upgrade process is to determine which member will be the Leading Member. [1]

In short, the Leading Member has the power to appoint and remove any trustee or members, ensure any death or other benefits only go to the Leading Member’s lineage by being the final voice on any BDBN or reversionary pension and can veto any Board decision of the corporate trustee if it runs counter to benefitting or protecting lineage.

  • Corporate, not Individual Trustee for a Leading Member SMSF

While we are here, a Leading Member SMSF, like the Royal Family lasts for generations which means we need a Trustee that stands the test of time, hence a corporate trustee. But not any corporate trustee, a special purpose Leading Member SMSF Corporate Trustee (“LMSCT”). The foundation of this special, special purpose SMSF Corporate Trustee is that the Leading Member owns all the shares and thus ultimately controls the SMSF. When Leading Membership is transferred because of the death or mental incapacity of the Leading Member, the outgoing Leading Member’s shares are automatically cancelled, and new shares are issued to the incoming Leading Member.

Warning: There is no member application process for a Leading Member SMSF. It is a process of appointment of a lineage member to the Fund. Of course, they need to consent to their being a member and importantly, agree to abide by the Governing Rules of the Fund and the wishes and desires of the Leading Member. It is their choice and more importantly, their responsibility to protect the castle. If the proposed member is not up to it, then they should not join. Simple! And any member may also be terminated from the Fund, for example, where they separate from their spouse and endanger the Family SMSF wealth. The Leading Member may terminate the Member and bring them back in post-separation. There is a long line of precedent for termination of Members in employer super funds where a member is no longer employed by the contributing employer.

[1] The problem with two spouses being Leading Members is that the idea of control vanishes. What happens where there is a stalemate between the two Leading Members? Of course, on the death or incapacity of the first Leading Member their spouse may become the Leading Member. Unlike the Royal Family we don’t have to be so structured in a Leading Member SMSF.

4. Section 17A requires all Members to be Directors

Section 17A of the SISA 93 requires all Members to be Directors, provided they have legal capacity. But like any company not all Directors have to have an equal vote. On some Boards, a Director may represent a major shareholder and have sway over key decisions of the company and the Board. In other circumstances, each Director may have an equal vote with a Chairman holding a casting vote. Yet in others, where a company is run across multiple jurisdictions, a Director from that jurisdiction may hold the casting or only vote for matters relating to that jurisdiction. Many special purpose corporate trustees provide Directors with differing votes or one member to have a casting vote.

In a LMSCT the Leading Member is always the Chairman with all directors holding an equal vote, but the Chairman has the right of veto. Remember the mission of a Leading Member SMSF is to look after and provide for generations of the originating Leading Member of the SMSF.

Unlike other SMSFs the overriding theme in a Leading Member SMSF is “Safe, Certain and Secure”.

5. Leading Member SMSFs and SMSF Advising

If you are not doing Leading Member planning for your SMSF clients, you are not thinking beyond the spouse. At so many of my seminars I ask the question – is it important that your money and assets stay within your lineage or bloodline? And you know what? 99% of the attendees put their hand up and the 1% who don’t – don’t understand the question. Then I look at their SMSF and wills and they could do with a good dose of Leading Member. Whose fault is that? Why is this happening in million and multi-million-dollar SMSFs? Something is going seriously wrong in SMSF adviser land.

The established competency standards for SMSF advising require an existing or new adviser to demonstrate the skills and abilities to advise a prospective SMSF Trustee and member or an existing SMSF Trustee and member on basic strategies for the Fund. With 90% of SMSFs built for two members only and the Fund to be wound up with the last surviving member, the advising timeline is terminally short and lacks substance and finesse. It is no wonder that many SMSF Trustees do not see any real strategic value in their SMSFs apart from being able to control their investments.

Now Leading Membership – that is a whole new ball game altogether! Multi-generational SMSF planning and advising.

Leading Member SMSF planning and advising takes into account a much wider set of standards and requires more specialist competencies. Not only must the Leading Member SMSF adviser be able to provide advice on SMSFs but also keep in mind the mission to protect and grow the family’s superannuation wealth for generations to come. It requires strategic and thoughtful planning to cater for future generations.

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