Member Incapacity & Enduring Power of Attorney

As people age in a Self-Managed Super Fund (SMSF), there becomes an increasing risk that a member may lose their mental capacity. A member losing their mental capacity could lead to them being unable to manage their financial affairs. Without taking into account this could happen, there is an unknown risk relating to who in the future will be able to control the SMSF and its ability to continue or function.

There is one key solution we recommend to all our clients in order to protect them from this risk. An Enduring Power of Attorney (EPOA) in place for members of any Superannuation, Pension or SMSF account can protect them from this risk. By allowing a trusted person to have an EPOA means that this person can be appointed as their Legal Personal Representative (LPR) in case the member loses their mental capacity. This protects the member by allowing the trusted person to act on their behalf so that the SMSF can continue.

The Enduring Power of Attorney

An EPOA is a legal authority to act on someone else’s behalf for legal and financial matters. A person must appoint their EPOA before they lose capacity and arrangements can be made so that they come into effect immediately or remain dormant until a specific event or circumstance arises. This document can continue after the person granting authority becomes mental incapacitated so the appointed person can manage their legal and financial affairs. Some actions that the EPOA can used for are disposal of property, deal with their legal and financial affairs, sign documents and make purchases on their behalf. This document does not mean the appointed person can make decisions about health and lifestyle matters; this can be done through a separate document called the Enduring Power of Guardianship. In addition, there is a difference between a Power of Attorney (POA) and an Enduring Power of Attorney. The main difference between an POA and EPOA is that an enduring power still has effect even after you lose mental capacity. A POA is a document you can sign appointing another person to act for you regarding your financial matters and you can be specific and write how long you want it to last for.

An EPOA in a SMSF and Wrap Account vary. In a Wrap Account, the trustee is the company that holds the money, for example MLC. MLC are the nominated trustee service, however if a member becomes mentally incapacitated, a person appointed with a valid EPOA for the member can act on their behalf and make transactions on the account.

The risk of a member losing their mental capacity is evident in today’s times. In 2020, there is an estimated 459,000 Australians living with dementia and 30% of people over the age of 85 have dementia. Without a medical breakthrough, it is expected that by 2058 there will be 1.076 million people living with dementia.

Types of risks in a SMSF with a trustee who has a mental incapacity

The first risk of a trustee who has a mental incapacity is that some documents require two signatures. If there is a trustee who is legally incapacitated this means that two signatures can’t be made for the document. An EPOA could overcome this as the LPR can sign the document on behalf of the trustee. Another risk that could be encountered is if the incapacitated member was the primary controller of the bank accounts. If they are unable to transact on behalf of themselves an EPOA can transact on their behalf and overcome this problem. One major risk of incapacity is that an incapacitated member cannot act as trustee or trustee director of the fund. There are possible superannuation law contravention issues and associated penalties.

SMSF Succession with an incapacitated trustee

An EPOA allows the member’s attorney to occupy the office of trustee or director of the trustee company to help ensure the SMSF can continue to operate smoothly if the member becomes incapacitated. In order to comply with the relevant laws, the LPR must be appointed as a trustee of the SMSF, the member must then cease to be a trustee of the SMSF or a director of the corporate trustee.

In conclusion it is critical all members have granted an EPOA to a trusted relative or friend. It is also critical that the trust deed has rules to automatically remove a trustee in the event of his or her legal incapacity. Some lawyers recommend that the PEOA specifically covers superannuation and SMSF interests.

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