SMSF trustees need to ensure they have a plan for lost mental capacity, SUPERCentral special counsel Brian Hor said, pointing to the potential for assets and operations to be frozen or falling into the wrong hands.
Worse still, funds could lose complying fund status triggering “catastrophic tax consequences”.
With these risks in mind, the superannuation and estate planning expert said there are 10 boxes to tick to ensure an SMSF is protected against loss of capacity.
1. Think about consulting a financial adviser
Mr Hor said advisers will discuss choices about who should be in control of the SMSF, the ongoing investment strategy and fund management and whether the best option would be to wind up the fund.
This advice can be supplemented with help from a lawyer or accountant.
2. Consider a corporate trustee rather than individual trustees
The planner said a corporate trustee could make things easier upon loss of capacity.
He explained, “For instance, if you lose capacity there is no need to change the ownership of the fund assets (which can be a costly and time consuming exercise) as they will be in the name of the corporate trustee, so that all that needs to happen is that you are replaced as a director.”
3. Establish an enduring power of attorney
This is someone who can be trustee to handle your financial affairs and can be appointed as trustee of the SMSF.
4. Check the trust deed for the SMSF
Mr Hor said the deed should allow for an enduring attorney to be appointed as trustee. “If it doesn’t, then have it updated accordingly.”
5. Implement a non-lapsing binding death benefit nomination
The trust deed might need to be updated to allow for this. However, it’s an important step, Mr Hor said, noting that loss of capacity and a lapsed nomination together would mean you would be unable to renew it.
“The trustee of the fund will have the discretion to pay your death benefit – perhaps to someone you did not intend to receive it,” he said.
6. Check the constitution too
“If you are a director and shareholder in a corporate trustee of the fund, check the constitution of the company to make sure that your enduring attorney can exercise the voting power on your shares so that they can be appointed as director in your place,” Mr Hor suggested.
7. Write instructions to the enduring attorney
“Put into place written instructions to your appointed enduring attorney and the other trustees or directors of the corporate trustee to let them know that you want your enduring attorney to be appointed in your place, and what their roles and responsibilities will be and what specific instructions you may wish to give to them regarding things such as dealing with particular fund investments,” he said.
8. Appoint a “back-up”
Mr Hor said one or more substitute enduring attorneys are critical for if your spouse is your first choice, as they are likely a similar age and could be at an equal risk of developing dementia or losing capacity. This means the back-up attorneys should be younger.
9. Construct a specific investment strategy
Mr Hor said this should prevent the fund’s investment strategy “going off the rails”.
“Put into place an investment strategy that clearly sets out what should happen and how it should be implemented, both before and after one or more members of the fund lose capacity, and ensure that it binds all the fund trustees,” he said.
10. Update your will
Will-makers are unable to change or make a will after loss of capacity, so it’s “critical” for those with SMSFs to ensure their wills are up-to-date.
“The only way you can give your super to persons who are not eligible to receive benefits directly from your SMSF is via your will,” Mr Hor said.
“For instance, unless you were in an interdependency relationship with them or they were your financial dependants, you cannot nominate grandchildren to receive a death benefit directly from your fund – instead you have to direct the death benefit to your deceased estate and then make a gift of the death benefit to your grandchildren under your will.”