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Dealing with loss of capacity and your SMSF

Dealing with loss of capacity and your SMSF

Loss of capacity can impact your SMSF, here are some questions to help ensure you're covered should anything happen.

The majority of self managed super funds (SMSFs) are two member funds, usually run by a couple. It makes sense for many reasons, such as alignment of SMSF goals with the couple’s retirement goals. Yet as people age some issues can arise which can impact the ability to make decisions – this is often referred to as capacity.

Can someone with limited capacity continue to be a trustee?

The ability to remain trustee of the SMSF will hinge on whether they have legal capacity. If they don’t have legal capacity, they cannot continue to be a trustee.

Understanding legal capacity can be difficult, it's possible to be capable some of the time and incapable at other times. To ensure any decisions are well informed, enlist the help of legal and medical professionals.

My partner and I are individual trustees, can we continue to run the SMSF?

To continue the SMSF the Fund must continue to meet the definition of an SMSF. For a two member fund with individual trustees, if one member loses legal capacity, they will need to be removed as trustee and you will need to find another trustee if the member wishes to remain in the fund.

A Legal Personal Representative (LPR) can be a trustee in place of a member who does not have legal capacity. This is an option if a legal instrument, such as an enduring Power of Attorney (EPoA), grants authority to your LPR to act on your behalf.

If there is no EPoA, you may need to apply to the guardianship board/tribunal to appoint an LPR. This may be a person such as a family member, or it could be the relevant public trustee.

The affected member could (via their LPR) instead transfer their benefits out of the SMSF. But, the (now single member) SMSF will not meet the definition unless you appoint a second trustee, or convert to a corporate trustee with a sole director.

What if we are directors of a corporate trustee?

For a two member fund with a corporate trustee, if one member loses legal capacity, they will need to be removed as a director and you will need to find another director if the member wishes to remain in the fund. Again, the member’s LPR can act as a director if the member has an EPoA. If there is no EPoA, you will need to apply to the guardianship board/tribunal to appoint someone as an LPR.

As a corporate trustee, the fund can operate with a single member and director and meet the definition of a SMSF. So there is an option to transfer their balance out of the SMSF and remove them as a director, without having to appoint an additional director.

Is the LPR an automatic appointment?

This depends on the terms in the SMSF trust deed and the company constitution. For individual trustees, the trust deed governs the rules for appointing a member’s LPR as trustee. LPRs can be an automatic appointment or the existing trustees may need to appoint them.

For a corporate trustee, the company constitution governs appointing a director. LPRs can be an automatic appointment or the existing directors may need to appoint them. But, if the LPR is already listed as an alternate director, they may not need to be appointed.

The rules for your fund should be available in your trust deed or your company constitution. If you’re not happy with the current rules, it's best to talk to a legal professional.

Should someone with legal incapacity remain part of the SMSF?

While the SMSF can continue to operate with the LPR and the remaining trustee/director (the member who still has legal capacity), this decision may come down to personal preference. But, if something happens to the remaining trustee/director, the SMSF may be in a fragile position.

If the LPR and remaining trustee/director are different people, a situation may arise where the members no longer control the fund. So it may be wise to review if the SMSF will still meet the needs of the members.

In cases where the spouse of a member who has lost legal capacity is their EPoA, the LPR and the remaining trustee could be the same person. If something happens to that person the SMSF may be in a position where no one can operate the fund. Leaving the fund with no one to handle administrative tasks such as making payments, buying or selling investments and ensuring the fund remains compliant.

In other scenarios, it may not be viable to remove the member from the fund. This could be the case if large assets, such as property, support the balance of the SMSF. Rolling a member out of the fund could force a sale of the underlying asset.

If you’re unsure about how your SMSF will handle these situations, talk to an SMSF accredited adviser.

What can you do to prepare?

The key is putting a plan in place early. Once a person no longer has capacity, the process becomes more complex and thus expensive.

1. Develop your plan, if one or all members could not operate the SMSF:

  • Who would you want to step in to operate the SMSF?
  • Would you want to continue to operate the SMSF by yourself?
  • Would you transfer one member out of the SMSF?
  • Would you close the SMSF?

2. Talk to those close to you about your decisions. Ensure the potential decision makers are ready and willing. Think of a back-up plan, if the decision maker is your partner, who would make the decisions if they cannot?

3. Review your SMSF trust deed and company constitution to find out the process of appointing a LPR. If you’re not confident, enlist the help of a professional to ensure it achieves what you want.

4. Estate planning is difficult and with different rules for different states and territories. Talk to a legal professional to put an estate plan in place tailored to an SMSF.

5. If you’re unsure about the best structure for your SMSF, or implications for your SMSF assets, talk to an accredited SMSF adviser.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Past performance is not an indication of future performance. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information. Commonwealth Bank is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law. Commonwealth Financial Planners are representatives of Commonwealth Financial Planning Pty Ltd ABN 65 003 900 169 AFSL 231139 a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 (the Bank). While potential SMSF investments have been illustrated within this content they do not represent a comprehensive suite of possible investment products and services within the guidelines pursuant to the SIS Act 1993 with ATO oversight.