It is not an exaggeration to say that being a member of an SMSF without an appropriately drafted enduring power of attorney (EPoA) is courting with disaster.
Indeed, the various potential pitfalls and problems that can arise for SMSFs where the fund member(s) do not have EPoAs mean that a person who is unwilling to have an EPoA should probably be strongly cautioned against having an SMSF in the first place.
It is thus vital that all SMSF members have an EPoA in place to deal with the situation of them potentially losing legal capacity or being unable to act in the future.
This article covers some of the key points in relation to the fundamental importance of EPoAs.
Reason 1 — helping the fund meet the trustee–member rules upon loss of capacity
To meet the definition of an SMSF in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA), all fund members must generally be trustees of the fund (or directors of a body corporate that is trustee) and vice versa.
Naturally, this compliance requirement can create serious difficulties where a trustee/director is unable to act at the trustee-level due to mental incapacity. For example, it is very common for private company constitutions to contain a provision along the following lines:
The office of a director will be vacated if the director is mentally incapacitated or becomes of unsound mind, loses legal capacity or becomes, or whose estate becomes, liable to be dealt with in any way under the law relating to mental health.
This standard constitutional provision means that a fund may cease to meet the definition of an SMSF six months after a director/member loses legal capacity (ie, after the grace period in s 17A(4) of the SISA has elapsed) if there are no pre-existing EPoA arrangements in place for the incapacitated member.
More specifically, under a special exception in s 17A(3)(b) of the SISA, funds can continue to meet the definition of an SMSF where a member’s attorney under an enduring power of attorney is appointed as a trustee or director in the member’s place.
Accordingly, having an EPoA in place can be of vital importance in relation to maintaining a fund’s compliance status where a member loses legal capacity.
Reason 2 — passing control to a trusted person
Under superannuation law, a fund member’s loss of mental capacity does not automatically pass control of their SMSF to any particular person.
Unfortunately, many SMSF members do not fully understand how succession to control of their fund works, and thus, they do not plan for it appropriately. Accordingly, it is often the case that control passes haphazardly or by default, ie, to the remaining trustee/director (if any) who retains legal capacity.
This can create difficulties, for example, in a blended family situation as the person who has lost capacity may have wanted their children from a previous relationship to have a say in relation to their SMSF. However, if the children were not already admitted to the fund and appointed at the trustee-level, they may only have very limited avenues to influence what happens with decision-making for the fund.
Similarly, if there is no surviving director or trustee with legal capacity (eg, in relation to a sole member fund), control of the fund may be put in limbo for a prolonged period due to the absence of proper prior planning.
An EPoA is usually extremely helpful in this regard because (subject to the SMSF deed, company constitution and the EPoA instrument), it may allow the attorney to ‘stand in the shoes’ of the incapacitated member in relation to helping achieve an intended structure for the fund/trustee that is aligned to the member’s succession planning objectives.
It must be noted that where a member’s attorney is not already occupying a co-trustee/director role, they do not generally become trustees or directors automatically upon the member’s loss of capacity. Rather, the attorney can help facilitate the intended outcome in conjunction with other steps being taken, such as:
- in the case of a fund with individual trustees, changing the fund’s trustee subject to the terms of the SMSF trust deed; or
- in the case of a fund with a corporate trustee, appointing new director(s) subject to the company’s shareholdings and the terms of the constitution.
Thus, it is important that the relevant SMSF deed and company constitution are reviewed, and if relevant updated, to ensure they are appropriate to enable appropriate appointments by the member’s attorney.
If an automatic succession mechanism is desired to appoint the member’s attorney, the successor director provisions in DBA Lawyers’ company constitution can be used to provide a smooth pathway for succession to control to occur in the event of the member losing legal capacity.
Trusted person
Of course, it should go without saying that the choice of appointing an attorney under an EPoA is a very critical one and only the right ‘trusted’ person should be chosen to act in this role.
Although a member may have some flexibility to substitute their nominated attorney for a different choice prior to losing legal capacity, it is likely to be difficult and costly to dislodge a nominated attorney once a member is incapacitated.
What happens when an SMSF member loses legal capacity without an EPoA?
Where a fund member loses legal capacity without an EPoA in place the situation of taking control of the SMSF is far less straightforward.
For example, it may be necessary for a family member or other interested party to apply to a tribunal in the relevant jurisdiction to become an administrator of the member’s living estate — eg, in Victoria via the Guardianship List of the Victorian Civil and Administrative Tribunal.
NB: an ‘administrator’ is another type of ‘legal personal representative’ (LPR) who can play a similar role to an attorney in many cases.
Unfortunately, the process of making such an application can be riddled with problems and uncertainties. One problem is that there is no guarantee as to who the tribunal will select to be the member’s administrator/LPR. For instance, the application could involve a contested process, and even if it is not contested, the tribunal may decide to appoint an independent administrator for various reasons.
Another problem is the additional cost and time associated with this process. For example, it should be borne in mind that the process of obtaining administrator status and then having the administrator appointed at the trustee-level could easily exceed the six-month grace period allowed for in s 17A(4) of the SISA for failures to meet the trustee–member rules. This may result in the fund facing compliance difficulties even where the parties take prompt action after the member’s loss of capacity.
Further, if the application is being made to the NSW Trustee & Guardian pursuant to the ‘managed persons’ regime in New South Wales, the situation is even more complex. Financial managers are subject to strict oversight by the NSW Trustee & Guardian and generally have more limits placed upon them than administrators. For instance, the standard directions and authority given to a financial manager may not cover dealings with the managed person’s SMSF. Thus, additional authorities may be required to take actions in respect of an SMSF and expert advice is likely required to address the issue.
For these reasons and others, attorneys appointed under an EPoA during the member’s lifetime will almost always provide greater certainty than the situation of needing to appoint an administrator/LPR after a member has already lost legal capacity.
Conclusions
It is absolutely vital that all SMSF members have an appropriately drafted EPoA in place that works in hand in hand with their intended succession plans and the relevant SMSF deed and related documents. Without one, when an SMSF member loses legal capacity, the member’s loved ones may well find themselves embroiled in a protracted and costly process (with no guarantee of the ultimate outcome) to have an administrator appointed with a view to assuming control of the fund and to help ensure the fund’s complying status.
Naturally, DBA Lawyers can assist clients to implement EPoA strategies that are properly integrated with their estate and SMSF succession plans.
Related articles
- Preserve the intended control of a company using successor directors
- Can an attorney (via an EPoA) make or revoke a BDBN?
- Advantages of the DBA Lawyers SMSF deed (2022-23)
- Planning your exit: a guide to SMSF succession planning
- Adding a member to an SMSF – pros and cons
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By William Fettes ([email protected]) Senior Associate, DBA Lawyers
DBA LAWYERS
23 February 2023
