Key points
- If an SMSF member loses mental capacity, the fund risks becoming non-compliant unless swift action is taken to remove them as trustee or director.
- Establishing an Enduring Power of Attorney (EPOA) for each SMSF member ensures continuity by allowing a trusted person to act on their behalf.
- Appointing a corporate trustee instead of individual trustees simplifies management and reduces risk in the event of a member’s incapacity.
What would happen if a member or trustee of your Self-Managed Super Fund (SMSF) suddenly lost mental capacity to make decisions? The short answer is your SMSF may be made non-compliant.
As SMSF members grow older it is increasingly important to understand how to prepare for, and deal with, the incapacity of an SMSF member or trustee.
There are two things you can do now to manage this risk and save yourself time and difficulties later.
- Set up an Enduring Power of Attorney (EPOA) for all SMSF members
- Appoint a corporate trustee rather than individual trustees.
Why act now? The risk of an SMSF member losing capacity is real
None of us are immune to having an accident or developing an illness that impacts our capacity to make decisions.
Whilst we are living longer and staying healthy for longer, the risk of mental and physical impairment increases with age. Almost 30% of SMSF members are over 70 years old, and more than 15% are over age 75. By 2056, more than 1.1 million Australians are expected to have dementia, many of whom may have an SMSF.
The impact of loss of a member’s capacity on your SMSF
If an SMSF member loses capacity to make decisions, they are deemed not fit and capable of acting as an individual trustee or as a director of the fund’s corporate trustee.
The SMSF will fail the definition of an SMSF and may become non-compliant. To ensure its smooth running, you must immediately remove that person as an individual trustee or director of the corporate trustee.
Unless you take other action, you then only have six months to pay out or roll out that member’s benefits and remove them from the SMSF. The problem here is that the member may not be eligible to have their benefits paid out, or the other SMSF members may not want to sell assets to facilitate a benefit payment or rollover.
All SMSF members should have an Enduring Power of Attorney (EPOA)
One action we recommend to SMSF clients to protect against loss of capacity is for each SMSF member to appoint an Enduring Power of Attorney. This is generally the person’s spouse or one of their children.
Giving someone else power of attorney can allow that person to make financial decisions on your behalf. An enduring power of attorney or EPOA remains in force even if you become legally disabled, or mentally incapable of making decisions. If an SMSF member becomes legally disabled, they can remain a member of the SMSF provided that their EPOA is appointed as an individual trustee or director in their place.
This is a simpler and more effective option than other alternatives. The only other way a person who has lost capacity can remain a member of an SMSF is if a state or territory administration tribunal appoints an administrator or guardian for that person, or if your SMSF appoints a registered superannuation entity as its trustee and becomes a Small APRA Fund (SAF) instead of an SMSF.
Appointing an EPOA now also gives that person time to understand the role and your wishes regarding decisions about financial matters. An estate planning lawyer can advise on the best way to draft an EPOA.
A corporate trustee rather than individual trustees
Another action to protect SMSF members against loss of capacity is for the SMSF to have a corporate trustee rather than individual trustees.
If a member loses capacity and cannot be an individual trustee or director of the corporate trustee for an SMSF, they can remain a member provided their EPOA is appointed in their place.
With individual trustees, this requires executing a Deed of Retirement and Appointment of a new trustee and will necessitate changing the legal ownership of all the SMSF’s assets to the new trustees to remain compliant. However, with a corporate trustee, it is a much simpler process to replace a director and as the company will continue to act as trustee, there is no need to update the legal ownership on all the assets. This makes it quicker, easier, less costly and less stressful to make swift changes to an SMSF.
Expert help for business owners in managing an SMSF
Superannuation is the most tax effective means of saving for retirement. An SMSF can provide benefits to business owners and individuals, even small to medium business owners and those with low super balances. With the rules regarding super constantly changing and compliance heavily regulated, expert advice can save you time and money as you maximise your super.
Pitcher Partners Newcastle and Hunter has a specialist superannuation team that understands every aspect of managing an SMSF. Our experienced team support clients with facilitating SMSF audits, managing SMSFs, tax planning, SMSF compliance and administration and technical support. Our online reporting technology gives clients real time information on how their super portfolio is progressing.
Have a question about SMSFs?
We love questions. If you want to know more about Pitcher Partners Newcastle and Hunter’s superannuation (SMSF), business tax and advisory, and wealth management services, please contact us.
