THIS IS PART 2 OF A FOUR-PART SERIES ON HOW TO BUILD A RETIREMENT FORTRESS WITH YOUR SMSF AND CLUE # 3 TO MY NEW BOOK OUT IN OCTOBER. HERE IS ANOTHER PIECE OF THE COVER.
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The same way a thief can kick-in a weak front door to your house, the same can happen to your retirement savings. As sure as armed invaders using ropes and ladders can scale up the stone walls of a fortress, desperate to get inside and get their hands on the king’s treasury, people today want to scale the walls of your retirement savings and steal and plunder your SMSF treasure. However the modern-day SMSF invader is not clad in animal skins and chainmail. Instead they wear slick business suits and silk ties. They don’t wield swords or carry a spear. Instead their weapon of choice is their silver tongues that spill forth lies and broken promises, all designed for you to lower your defences and drawbridge to let them inside. Their shields and armour are the countless disclaimers and complex agreements that they get you to sign, protecting them not you from financial loss. It’s time now to turn the tables on them and stack the deck in your favour by building a retirement fortress.
There are 3 keys steps in building a retirement fortress and you must follow each step, in the exact order that I’m going to layout for you. If you follow these 3 steps, you will build a retirement fortress that will weather any financial storm, and repel any invader. Its walls of stone, rock and timber, will discolour and fade with time, but they will still be standing long after you are gone. A strong retirement fortress is designed to out-live you and so it should, so your valuable fortune can pass to the next generation as you leave a lasting legacy of family built wealth that will continue to grow and be enhanced in your memory.
If you fail to build a retirement fortress, then you risk losing everything that you have worked so hard to accumulate. When you then retire and throw open the doors to your fortress treasury, it will be cold, empty and stripped bare. Don’t let this happen to you.
Step #1: Seek the Higher Ground
The best location for any fortified building or structure is always the higher ground. From this vantage point, looking down on the land below, you can see all approaching threats and can take action sooner. From the higher ground, you are less likely to be caught off-guard or be taken by the “element of surprise”. That’s why most castles, forts or military encampments tend to be strategically built on the higher ground. It is a superior position. The higher ground is easier to defend and you certainly don’t want to be caught fighting an uphill battle. If you do then you and your troops will get exhausted and will face ultimate defeat. Defend from the higher ground not from the low-lands.
From the higher ground, you can lay a solid foundation that forms the base of your retirement fortress. Like a house, if you build a weak and brittle foundation, the house will sink and eventually collapse. If you use sub-standard materials, opting for cheaper building materials, they will too deteriorate faster over time and the structure will eventually collapse.
So what is the higher ground that you seek when designing and building your retirement fortress? What will give you that bedrock foundation upon which you will build your fortress?
The higher ground and strong foundation of all self-managed superannuation funds is its trust deed. The SMSF trust deed is the bedrock that you seek. Perched high on a hill or cliff is where you want to live out your retirement years, not in the soft mud of the low-lands where you will sink and eventually drown in the swamps.
“One Good Deed Does Not Deserve Another.”
All superannuation funds are governed by a trust deed but not all deeds are created equal. There are plenty of service providers in the market place from cheap on-line SMSF providers to hugely expensive law firms, all fighting for your dollar. Here are my 5 tips for finding the right trust deed for you:
5 Tips When Selecting Your SMSF Trust Deed
1. Don’t be Cheap - Now is not the time to skimp and be cheap when setting up your SMSF foundation, being the trust deed. I’ve seen some really deficient and cheap trust deeds that are not worth the paper they are printed on. As you know, you are travelling the Promised Land. You will come across all manner of slick salesmen and magic potion-sellers that will try and sell you what they claim to be a suitable SMSF trust deed that is nothing more than tap water in a fancy bottle.
There are literally hundreds of superannuation service providers in the marketplace and most of them who are online peddle cheap and out-dated SMSF trust deeds. Do not be fooled by them, you pay for what you get. Don’t risk using one of them to form the foundation of your retirement future otherwise you will end up living in retirement poverty.
When I set up a SMSF trust deed, I use a proper face-to-face company who have the full support of a legal team who are constantly reviewing and monitoring the superannuation laws so that their trust deeds are constantly being updated to reflect the current SMSF Legislation. I’ve seen trust deeds that I know for a fact are more than 10 years old being advertised and sold as “the latest” on the market. They are just copies of old trust deeds that are on-sold to the unsuspecting. Many on-line trust deeds you can buy today are being churned-out by offshore sweat-shops where there has been minimal legal thought or quality control put into what you are buying. Beware.
You must understand that the Government wants to tax your superannuation and is always thinking up weird and wonderful ways to steal your money. They can literally pass legislation overnight that can have a direct and harmful impact on your retirement savings. Only a proper SMSF trust deed can protect you. Don’t rely on a cheap on-line service provider for your trust deed, otherwise your SMSF fortress will be formed on a bed of mud and sand instead of granite rock.
2. Read the Trust Deed Cover-to-Cover – I know this sounds boring and tedious but you need to do this. The average trust deed runs for approximately 50 pages but you must invest the time and effort in developing your financial intelligence so that you can understand the fundamentals of how your SMSF works.
I recommend you make a copy of your SMSF Deed and sit down one afternoon with a cup of your favourite coffee and with a highlighting pen and a pencil and go through it line-by-line. Highlight clauses, underline lines and make notes in the margins on anything you don’t understand. This should take approximately two hours and when you are finished you will have a list of questions that you can ask your SMSF provider or your accountant to help explain to you. This service from them should be free of charge. I know that from the company that I use I can call up their legal team anytime, at no cost to me, and have them explain to me in plain English some of the clauses in their trust deed. You certainly cannot get this from an on-line provider where they hide behind the veil of the Internet and you will never get to talk to a real person.
3. Get the Deed Up-Dated Every 3 Years – With governments getting greedier and wanting to get their hands on your retirement money sooner, legislation can change overnight. One of the fastest ways to raise government revenue quickly is to amend the superannuation laws and snip some more cash from self-funded retirees. This means that parts of your SMSF trust deed will outdate over time and it needs to be updated so that it reflects the current legislation.
When new clients come on board with me, the first thing I do is read their SMSF trust deed cover-to-cover so I can determine how old it is. I once had a client come to me with a trust deed that was over 25 years old! I couldn’t believe that he was still relying on it being effective in the current legal environment.
You need to get your trust deed reviewed and updated a minimum of every 3 years otherwise you run the risk of it restricting the money you can access in retirement that is tax-free. The last thing you want is to retire and to start to draw a pension from your SMSF only to discover that the law has changed, and because your trust deed does not reflect these changes, you end up paying tax.
4. Don’t Overpay – Whilst I said don’t be cheap when selecting your SMSF trust deed, the opposite is also true. In the Promised Land you will find so-called experts who will want to sell you their SMSF trust deed at an exorbitant price. They will try and convince you that you need to pay thousands of dollars for their trust deed because it’s the best one in existence. Once again these people roam the Promised Land clutching their trust deeds and preaching that theirs is the Bible of all trust deeds. Whilst still only tap water in a fancy bottle these trust deeds are only slightly better, these have been gift wrapped with a fancy ribbon, nothing more.
I know plenty of lawyers who credit their trust deed as being the best and for that privilege you will pay upwards of $10,000! Whilst their trust deeds may look thicker and are bound in a nice, gold embossed leather cover, they are crammed full of useless clauses that simply “pad out” an otherwise ordinary trust deed to make it look impressive.
So how much should you really pay for a SMSF trust deed set-up? For a SMSF Trust Structure with a Corporate Trustee you should pay no more than $3,000 to $4,000 and certainly no less than $2,000.
If you say, “How do I know if I’m getting value for money or whether or not this trust deed will be any good?” My advice here is simple. Use a reputable SMSF service provider and I would be very suspicious with fully on-line ones. If in doubt ask them what makes their deed so special and ask them what sets their deed apart from all the other SMSF trust deeds on the market. If they cannot succinctly and easily explain to you want makes their deed better for the price that you are paying, then do not use them.
5. Essential Inclusions – Make sure your SMSF trust deed includes all the required clauses and that nothing important has been left out. This certainly doesn’t mean that your trust deed needs to be over-engineered and you end up paying thousands of dollars more for numerous pointless and unnecessary clauses. However, there are some fundamental features that your trust deed must have if it is to form the solid foundation of your retirement fortress. So I asked Stephen Harvey, Head of Legal Services at ACIS what would be his Top 5 essential inclusions for an SMSF trust deed:
· Proper and well drafted succession provisions – these need to fit with any estate plan for the relevant member including their Will and Binding Death Nomination (if any) in order for the estate plan to work as intended. Many permissive trust deeds simply do not deal with the mechanisms for appointing or removing trustees/members and how benefits are to be dealt with on death. Many of the permissive type deeds simply say things like “the Trustee will be appointed or removed in accordance with SIS.” The problem is the SIS Act does not deal with these mechanisms at all so there’s an obvious area for disputes.
· Proper and well drafted amendment powers. Again many permissive trust deeds simply do not deal with the mechanisms for amending and simply say things like “the Trustee can amend in accordance with SIS.” Again the SIS Act does not deal with these mechanisms at all so there’s another obvious area for disputes.
· Proportional voting – these types of provisions are inappropriate and dangerous.
· Provisions that permit members to make binding death nominations (lapsing and non-lapsing) are essential if members are going to do this. Where such provisions exist, they should prescribe a minimum set of conditions to a valid nomination so that there is no room for the nomination to be challenged.
· Provisions which permit the trustee to take out life insurance in relation to members – ideally such provisions should permit either (a) the trustee to deal with proceeds of insurance in a discretionary way or (b) the member to direct the trustee that insurance proceeds must be added to their account balance.
· Provisions which permit the trustee to receive contributions and pay out benefits in specie (An in specie payment is made from fund assets instead of money i.e. publically listed shares).
Whichever service provider you use to set-up your SMSF, make sure you have these clauses included. Also ask them to explain to you what these provisions in your deed do and what they mean.
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NEXT WEEK : STEP #2 TO BUILDING A RETIREMENT FORTRESS AND CLUE #4