Independent legal advice best for LRBAs
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Darin Tyson-Chan is a journalist with InvestorDaily, a Morningstar publication.
Obtaining independent legal services and advice is preferable when establishing a limited recourse borrowing arrangement (LRBA) for a self-managed superannuation fund (SMSF), according to a specialist legal firm.
Anecdotal evidence from a number of SMSF trustees suggests LRBA providers, namely banks, are encouraging clients to use the lender's legal service to draw up all of the legal documents and provide the legal advice associated with the loan.
Lending institutions are arguing a case for their legal services on several grounds.
"A number of our SMSF clients have told us recently that when arranging a loan from their bank, the bank advised them that it would be cheaper to have the holding trust deed and associated documents prepared by the bank's lawyers," Townsends Business and Corporate Lawyers said in a statement.
"The rationale, we are told, is that the fees for a further legal review to be conducted for these documents during the lending process would be charged at a lesser rate than if another firm prepared the documents."
Townsends pointed out trustees should be aware that if a lawyer was acting on their behalf, consent must be sought to do so.
"If you are not asked to consent, this means the bank's lawyers are not acting for you. If they are not acting for you, then you cannot rely on their work and would have to have it checked, thereby negating the alleged fee saving," it said.
"We are told that when the bank's lawyers have prepared these documents, if a trustee seeks clarification or advice on the documents, the trustee is advised to engage a different firm to provide legal advice to it on the documents. The bank's lawyers cannot advise you on the documents they have prepared if they are not acting for you."
In addition, some SMSF trustees are also under the impression they are obligated to have the bank's legal department draw up the holding trust for the LRBA and any other necessary documentation.
"Clearly this is not the case. It is of vital importance to have independent legal advice," Townsends said.
The SMSF specialist firm emphasised one of the most important reason to have trustees seek independent legal advice was so they could be assured of having the firm's professional indemnity insurance to protect them if something should go wrong.
"Clients won't have access to that if the bank's lawyers are not acting for you. Any mistakes that are made could leave them high and dry," it added.