Self-managed superannuation funds (SMSFs) continue to be a popular wealth retention and investment vehicle in Australia. However, SMSFs are highly regulated and there continues to be increased complexity and legislation imposed upon SMSFs. Just as it is important to have an estate plan which deals with what happens on death and incapacity, it is equally important to consider how these events will impact SMSFs and ensure you put in place an appropriate plan.
Under the Superannuation Industry (Supervision) Act 1993 (SIS Act), a SMSF must satisfy a number of conditions to remain compliant. In particular, generally each individual trustee must also be a member and each director of a corporate trustee must also be a member (Section 17A SIS Act)
Accordingly, if a SMSF member ceases to be a trustee or director of a trustee by reason of incapacity, the SMSF may no longer be a complying fund. Despite this, a fund will remain compliant if there is a member who has an enduring power of attorney in place (Section 17A (3) (b) SIS Act). This will ensure:
- the fund can continue to satisfy the definition of a SMSF if they lose capacity; and
- the member can choose their most appropriate replacement as trustee or a director of the trustee.
However, following are some important points to note:
- the power of attorney must be current and in force before the member loses capacity;
- the power of attorney must accord with relevant State or Territory legislation;
- the attorney must actually step into the shoes of the member in accordance with the relevant laws and requirements;
- members should carefully consider the identity of the attorney; and
- members should consider the scope of powers given to an attorney.
It should be noted that an attorney validly acting under an enduring power of attorney to replace a member as trustee/director of a SMSF may arise in more than an incapacity situation. It can also arise where the member is going overseas for an indefinite period of time or a member simply no longer wishes to exercise their individual authority (e.g. they may wish for their children to step in and take over their SMSF affairs).
Compliance with relevant laws and requirements
The process of an attorney stepping up to control a SMSF is not straight forward or automatic. It is not a simple case of presenting the enduring power of attorney to the bank or broker who might hold/control cash or shares of the SMSF. The incapacitated member must be removed as trustee or director and the legal personal representative appointed as trustee or director of the trustee, all in accordance with the relevant legislation and the governing rules of the SMSF (that is the trust deed and company constitution, if applicable).
The legislation provides for a 6 month ‘grace’ period to get the fund in order. This means the replacement must be appointed within 6 months of the incapacity, unless the member regains capacity within that period and can resume their duties.
It is important to note that the attorney becomes the director or trustee of the SMSF in their personal capacity. So instead of being bound by the relevant State and Territory powers of attorney legislation, they will actually be bound by general law trustee fiduciary duties as directors duties under the Corporations Act 2001.
Identity of attorney
An enduring power of attorney can be executed in favour of multiple attorneys (in Queensland, a maximum of four who need to agree on all decisions). You should however check that the constituent documents of the SMSF are not breached in terms of numbers of attorneys acting.
Frequently a member will consider practicality and only appoint one or two attorneys even though the member may in fact intend more than those persons to ultimately benefit from the SMSF after death. Court decisions such as Katz v Grossman [2005] NSWSC 934 and Ioppolo & Hesford v Conti [2013] WASC 389 emphasise the importance of considering the scope of the powers given to your attorneys.
In Katz v Grossman, the deceased left a son and daughter who the deceased intended to equally benefit from his estate. The daughter however was in control of the SMSF on death (worth around $1 million) and caused the death benefit to be paid directly to her rather than through the estate. It was determined she was legally able to do this. In Ioppolo & Hesford v Conti [2013] WASC 389, the wife did not intend her husband to receive her SMSF death benefits but at the time of her death, her husband was in control of the SMSF and paid all her death benefits to himself.
These unintended results can be avoided by:
- ensuring control passes to all intended beneficiaries; or
- the member putting in place a binding death nomination to ensure their benefits go to the intended beneficiaries and ensuring the attorney does not have power to alter this nomination.
It should be noted that there can sometimes be tax or estate planning advantages in ensuring that a binding death nomination is put in place and in an appropriate case, a member may wish to ensure that the attorney has power to make a binding death nomination in favour of themselves or the member’s estate.
What happens if a member loses capacity without an enduring power of attorney in place
It is possible where a member loses capacity for family members to apply to the relevant State Guardianship Tribunal to appoint a legal personal representative to act. However, this can be time consuming and costly with uncertain outcomes in terms of whether it can be completed within 6 months and the ultimate identity of the appointed representative.
Overall, there are special issues involved in estate planning where a SMSF is involved and it is important members seek the proper advice to tailor an appropriate solution.
