SMSF – Corporate Vs Individual Trustees

You can have an SMSF where one individual is both the sole member and the sole director.

A company has an indefinite life span; in other words, it cannot die. Therefore, a corporate trustee can make control of a SMSF more certain in the circumstances of the death or incapacity of a member.

There is no dispute about an SMSF with a corporate trustee being able to pay benefits either as pensions or as lump sums.

When members are admitted to, or cease, membership of the SMSF, all that is required is that the person becomes, or ceases to be, a director of the corporate trustee. As the corporate trustee does not change, title to all the assets of the SMSF remains in the name of the corporate trustee.

As companies have limited liability, a corporate trustee will provide greater protection where a party sues the trustee for damages (especially if that company only acts as trustee of the fund).

A corporate trustee ensures greater flexibility for estate planning, as the trustee does not change as a result of the death of a member.

If the trustee does something wrong and the ATO hits it with an administratively penalty, the penalty will only apply once (because there is only one trustee).

A sole member SMSF must have two individual trustees.

If the SMSF has individual trustees (Eg, a mum and dad SMSF), then timely action must be taken on the death of a member to ensure the trustee/member rules are satisfied (SMSF rules do not allow a sole individual trustee/member SMSF).

Some practitioners argue that a member of a fund without a corporate trustee can only be paid a lump sum if they have first started a pension (and then they must surrender or commute that pension entitlement), as an SMSF trustee must be a corporation or have a primary purpose of paying a pension. Extra paperwork may therefore be needed.

To introduce a new member to an SMSF with individual trustees requires that person to become a trustee. As trust assets must be held in the names of the trustees, this will require the title to all assets to be transferred to the new trustees when a member is admitted to (or exits) the fund.

If an individual trustee suffers any liability, the trustee’s personal assets may also be exposed (and the SMSF’s assets may be exposed if the individual is sued personally).

The death of a member requires there to be a change of trustee, and this gives rise to considerable administrative work and costs at an inopportune time.

If the trustees do something wrong and the ATO hits them with an administratively penalty, the same penalty will apply to each trustee (i.e., the total penalty will be increased based on the number of trustees).