Preparing for Loss of Capacity – It Can Happen at any Age


Many of our aging population are Trustees of a self-managed super fund (SMSF). At some point, one or more members of an SMSF may become temporarily or permanently incapacitated due to illness, aging or an accident and as a result, incapable of managing their role as Trustee.


Where a Trustee of a SMSF or the Director of a Corporate Trustee of an SMSF loses their mental capacity – the other Trustees or Directors must retire them from their duties.


Assuming the SMSF Trust Deed allows and under Section 17(A)3 of the SIS Act 1993, a member’s Enduring Power of Attorney may become the member’s replacement Trustee or subject to the constitution of the Corporate Trustee – the replacement Director.


Preparing for “loss of capacity” eventually well in advance will enable membership of an SMSF to continue, regardless of capacity.


What should be done?


All SMSF members should appoint a legal personal representative (LPR) under an Enduring Power of Attorney (EPoA), regardless of whether their fund has individual Trustees or a Corporate Trustee.


Should a member (the EPoA “Donor”) lose capacity and be unable to fulfil their role as Director or Trustee, their LPR may be able to step into this role, ensuring ongoing operation of the fund.


Who do you get to be an LPR?


Ideally an LPR should be a relative, friend or adviser who understands the requirements of taking the place of an SMSF Trustee and who has sufficient time to devote to the task. Although the LPR would be “standing in” for the Trustee/Director, they would assume full responsibility as a Trustee or Director of a Corporate Trustee.


Better check your Trust Deed


Make sure your SMSF Trust Deed is flexible enough to allow for the appointment of an LPR as replacement Director (or Trustee, if an individual Trustee fund) should a member become incapacitated.


Another important step in preparing for incapacity is to ensure the Trustee structure allows for an LPR to smoothly and quickly replace the member.


An SMSF with “individual Trustees” pose the greatest difficulties where an LPR has not been appointed.


It is way too late to appoint an LPR, once a member has lost capacity. Remaining members of the SMSF may have the power to remove the Trustee, but not appoint a replacement.


Probably a big benefit of an SMSF with Corporate Trustees is that it is an easy appointment to remove Directors of the Corporate Trustee.


Is a General Power of Attorney sufficient?


An Enduring Power of Attorney continues to operate after you have lost mental capacity whereas a General Power of Attorney ceases on loss of mental capacity.


An Enduring Power of Attorney must be explained and witnessed by a legal practitioner or other prescribed witnesses such as a registrar of a local court. A General Power of Attorney need not be witnessed by a legal practitioner.


Every member of a SMSF should put in place an Enduring Power of Attorney regardless of their age to ensure their fund remains a complying fund and a member’s account balance can remain in the fund if they suffer from incapacity.

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David Watkins, has been providing advice to clients since 1987. He is a Certified Financial Planner, a member of the Financial Planning Association (FPA), and Superannuation Professionals Association of Australia (SPAA).Google Plus


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