The Importance of Legal Review when updating your SMSF Trust Deeds

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The provision of individual legal review on your SMSF deed updates is essential to protect you and your clients from future litigation.

Individual legal review and sign off is the process of a lawyer examining the current Trust Deed of your Superannuation Fund and confirming documentation prepared to update the Trust Deed has been prepared correctly.

Updating an existing SMSF to a new deed is more than simply noting the variation clause.

There may be additional parties required to consent to the update, conflicting clauses in the current deed, clauses that must be retained in an upgrade and many other issues that can complicate the deed update process.

These additional requirements have an affect on the way the documents required to update the deed are drafted. And whilst some deeds may be easy to update, and can be done using a standardised template, many deeds require drafting outside the ‘norm’ which requires legal expertise to ensure they are prepared correctly.

Without the input of a lawyer to ensure these additional requirements are met, there is a chance that the documentation prepared will be invalid, and open to challenge and possible litigation in the future.

For this reason it is essential that when you order deed updates, there is a lawyer involved in the process to sign off to say that each update has been prepared in line with the requirements of the current deed for the Fund.

Automated deed updates – the issues

There are a number of deed providers that enable you to order deed updates online and to receive them instantly via email – that is, they do not provide individual legal review.

Whilst a convenient way to receive documentation, and at times, a cheaper way to update deeds, the risks associated with ordering deeds in this matter are high. Why? Because no matter how sophisticated an online system is, it cannot cater for the variation requirements of every deed in the market. This being the case, there is a strong likelihood that a percentage of your deed updates will not be prepared in line with the requirements of the current trust deed for the Fund, creating potential issues for you and your clients in the future.

What requirements might not be catered for?
The following are just a few common examples of circumstances where an automated deed update system may not create a valid deed update due to the complexity of the variation requirements set out in a particular SMSF deed:

• where a principal employer or other party is required to update the deed, but that party is no longer in existence (very common with employer orientated deeds)
• where a party other than the trustee is required to execute the deed update, and this party is omitted from the deed update application form
• where a notice requirement is paramount in the deed, and is not noted or followed in the prepared documentation

Litigation Risks for your firm

When you order a document via a strictly online provider, you are required to complete an online application to provide the information for the provider to automatically create your new deed. During this process you are required to interpret the current deed to determine the parties and procedures required to update the trust deed.

Your answers are therefore dictating how the documents are being drafted.

The issue paramount is if the documents end up being created incorrectly because of your interpretation of the trust deed, or your omission of a required party. Should the deed or the actions of the trustees or members be challenged in the future as a consequence, you may be the one who the trustees of the fund take action against.

And if such an occasion occurred, your Professional Indemnity insurance is not likely to cover you because this situation has occurred as a consequence of you interpreting a legal document, and only a lawyer’s PI insurance will cover that.

What are the specific risks?

So what happens if a deed is challenged and deemed invalid in the future?

The highest litigation risk associated with invalid SMSF trust deeds is the challenging of death benefit payments by beneficiaries who ‘did not receive their fair share’.

Where a deed is updated and the members create BDBNs under the terms of the new deed, if that BDBN is challenged in the future, the first thing that will be looked at is the current deed for the Fund. If the deed is deemed to have been invalidly created, it can bring into question the ability of the member to make the BDBN (depending on the terms of the prior deed that was in place). If the court determined the deed update was invalid, it could present a very real litigation exposure for your firm if that BDBN is challenged successfully and a beneficiary who was otherwise ‘entitled’ to a death benefit is deemed to longer be entitled. This is because you provided the information that was used to create the updated deed in the first place, and in doing so, you engaged in legal work by reviewing the trust deed.

The number of cases being heard where BDBNs are being challenged are ever increasing, with a variety of outcomes including the deeming of BDBNs to be ineffective.

With an aging population, these challenges will increase exponentially over time.

Don’t assume the risk

The risks associated with using strictly online deed update services are many, but the price to ensure compliance and validity is low.

If you are looking to update your SMSF trust deeds, ensure you protect your firm and your clients by having a lawyer review and sign off on your deed updates as part of your deed update process.

Legal peace of mind

Topdocs manages the issues associated with updating SMSF trust deeds by:

• Interpreting each deed we receive to properly determine the procedures and parties required to update the deed;
• preparing any specific drafting required to ensure the deed update is done correctly; and
• providing you with an individual letter of legal sign off from a specialist lawyer at Topdocs Legal Pty Ltd on all deed updates we prepare for you, stating the deed update has been correctly prepared.

Topdocs also provides for online ordering of deed updates, to ensure ordering your documents is quick and easy. But to ensure legal protection for you and your client we don’t however allow you to instantly download your deed updates. Instead, we prepare them in house, after we have interpreted the Fund’s Trust Deed, ensuring your documentation is prepared correctly.

Please note this article is for information purposes only and does not constitute legal advice. Should you have any queries or require more information, please contact the team at Topdocs on 1300 659 242.


This article first appeared on Topdocs.

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