30 Jun Who’s going to look after your SMSF when you can’t yourself?
As part of your estate planning, you’ve prepared your will (you have, haven’t you?) and you’ve made a binding beneficiary nomination for your super fund. But what about an enduring power of attorney? This element of estate planning is often ignored; after all, nobody likes to think about adverse what-if scenarios. But for self-managed super fund members and trustees, the risks of not appointing an enduring power of attorney can be substantial and can limit your fund’s ability to operate.
Why EVERY member of a SMSF needs an enduring power of attorney
The big reason is to remain compliant, and therefore eligible for concessional tax treatment. Every member of a SMSF must be either an individual trustee or director of the corporate trustee – but if you lose mental capacity, or even if you are overseas for an extended period of time, you can’t legally act as a trustee. This then leads to a situation where if you cannot act as a trustee or director of the corporate trustee then the SMSF becomes non-compliant and could be subjected to the highest marginal tax rate.
The other reason is so that your account balance can remain within your SMSF if you lose mental capacity or if you are overseas for an extended period of time.
What happens to your SMSF if you don’t have an enduring power of attorney and lose mental capacity?
Loss of mental capacity may happen over time, as with Alzheimer’s and dementia, or it can be sudden and unexpected after an accident or illness. So if you haven’t prepared an enduring power of attorney, what happens? In a nutshell, your proportion of fund assets needs to be rolled over to a public fund. Considerations also need to be made for how documents requiring multiple signatures can be executed, how assets are sold and bought, and how pension or lump sum withdrawals are made.
If it’s a sole member fund, the SMSF needs to be wound up and assets rolled over to an approved alternative fund. If the fund has another member, such as your spouse, that spouse can remain in the fund by converting the fund to a sole member fund, or they could invite another family member to join the fund and become a trustee so that the fund remains compliant. However, in either of these scenarios, your interest in the fund as the member who lost mental capacity, would need to be sold and rolled over to a public offer fund.
Who can you appoint as an enduring power of attorney?
You can appoint an existing member of the fund, like your spouse, to act on your behalf as trustee. If you are a sole member, you need to appoint someone else such as a family member or a professional advisor. Whoever you appoint as your enduring power of attorney must be over 18 years of age and have the mental capacity to make decisions. You may nominate whether the power of attorney comes into effect immediately or only if certain conditions are reached, for example you are going to be overseas for an extended trip or become mentally incapacitated.
It is vital that whoever you choose as your enduring power of attorney, you trust them implicitly. An enduring power of attorney can do anything you can do, including selling all your assets. Similarly, whoever you appoint as enduring power of attorney needs to be aware that when they are appointed as a trustee or director of your SMSF, they are operating not on your behalf but in their own right. This means that all decisions are made at their own discretion, with full legal responsibility for those decisions.
To make an enduring power of attorney appointment, speak to your solicitor. Comprehensive estate planning is important for everyone, but that is especially true for trustees of self-managed super funds.
Do you need advice for your SMSF? We can help you to manage your fund’s compliance and recommend other professionals to provide an end-to-end service for SMSF trustees from set up and annual reporting through to paying benefits and winding up the fund.
Related topics: Death and your self managed super fund.