Holding a trustee position comes with significant duties and responsibilities, Townsends Business & Corporate Lawyers solicitor Jeff Song said.
SMSF trustees also cannot have a legal disability, like a mental incapacity, so funds and their members should have plans for this possibility.
“This means, if a trustee or a director of an SMSF loses mental capacity whether by deteriorating health conditions or by tragic accident, appropriate actions need to be taken within six months in order for the fund to comply with the above requirement and maintain the fund’s complying status,” Mr Song explained.
He gave the example of James and Mary, members and individual SMSF trustees. After both losing mental capacity in an accident, their son John, who was previously appointed enduring power of attorney by his parents, wants to step in as trustee.
“The superannuation law provides that an enduring attorney of a member who lost mental capacity may be a trustee of an SMSF (or director of the corporate trustee) in place of the member,” Mr Song commented.
“However, it is important to understand that this is not an automatic replacement and is not always as easily done as some people may believe.”
He explained that formal appointment of the enduring attorney as the replacement trustee, as well as the original trustees’ retirement, are required.
“This requirement for formal appointment and retirement also applies to any director of a corporate trustee of an SMSF,” Mr Song said.
As such, SMSF trustees and members need to be prepared to do more than just appoint an enduring power of attorney.
He reminded savers that with a trust deed that doesn’t allow for an alternative decision maker to formally appoint replacement trustees, the situation can become much more complicated and expensive.
“If the trust deed only allows the current trustees or members (i.e. James and Mary) of the SMSF to appoint replacement trustees, then this appointment power can no longer be exercised as the current trustees/members have both lost their legal capacity. John would need to apply to the court, which would be a significantly more time consuming and costly process,” Mr Song explained.
“To avoid this, members should obtain advice regarding the trustee structure and terms of the current trust deed to allow appropriate means of appointing replacement trustees to protect against the risk of members losing mental capacity.”