HOW PREPARED ARE YOU FOR THE DIRECTOR/TRUSTEE TO UNEXPECTEDLY LOSE CAPACITY?
In recent times, we have seen the issue of a trustee/member of a self-managed superannuation fund losing capacity causing unnecessary stress and expense to unsuspecting families.
When a trustee/member (often a parent) loses capacity, the family is busy dealing with the heartbreak, nursing homes, banks, property transactions and then - BAM - trusteeship of their self-managed superannuation fund is thrown into the mix.
The process does not have to be difficult. These issues often arise because the incapacitated trustee did not have a valid or up-to-date enduring power of attorney.
Let us explore some of the reasons why having an enduring power of attorney is important when running a self-managed superannuation fund.
TRUSTEESHIP OF FUND
The superannuation laws are strict in respect of who must act as trustee of an SMSF on behalf of a member.
In short, if you are individual trustees of an SMSF, all members (if two or more) must be trustees of the Fund. If you have a corporate trustee of an SMSF (which is our preference), all members must be directors of the corporate trustee.
The superannuation laws further provide that the above-mentioned rules will continue to be satisfied if the attorney (appointed under an enduring power of attorney) is appointed as trustee/director in place of the member. Where there is no enduring power of attorney, the member may need to be rolled out of the fund or an administrator appointed by the court.
Let us look at some real-life examples:
Bob and Wendy are directors of a corporate trustee of a self-managed superannuation fund – Bob and Wendy Super Pty Ltd as trustee for the Bob and Wendy Builder Superannuation Fund. They are the only members of the Fund.
They both have up-to-date enduring powers of attorney which they reviewed with McInnes Wilson Lawyers (MCW) at the end of the last financial year. They have appointed each other as their attorneys in the first instance.
Bob loses capacity and is removed as a director under the constitution of Bob and Wendy Super Pty Ltd. Because Wendy is Bob’s attorney under an enduring power of attorney, she can continue to act as director in her own capacity as a member and as director in place of Bob. No further appointments are necessary.
Wendy contacts her Fund administrator and MCW, who work together to prepare documents confirming Wendy’s continuing appointment as director of the trustee in place of Bob and update the Australian Securities and Investment Commissions register, removing Bob as director.
With the trusteeship of the Fund now sorted, Wendy can continue to focus on caring for Bob.
Costs to engage MCW to prepare the above-mentioned documents – approx. under $1,000.00 exc GST.
Following from the facts in Scenario 1 except that Bob and Wendy are individual trustees of their self-managed superannuation fund.
Bob loses capacity and is removed as an individual trustee under the trust deed for the Fund. Because Wendy is Bob’s attorney under an enduring power of attorney, she can continue to act as trustee in her own capacity as a member and as trustee in place of Bob.
Because they are individual trustees, they will need to update the title of the investments of the Fund to remove Bob as a trustee. Wendy contacts her fund administrator and MCW who work together to prepare documents to remove Bob as a trustee of the investments of the Fund, confirm Wendy’s appointment as trustee in place of Bob and update the trustee’s name on the Fund’s investments.
Costs to engage MCW to prepare the above-mentioned documents – approx. $1,000.00 - $2,000.00 exc GST. There are also further costs of the fund administrator to update investment and title registries.
Following on from the facts in Scenario 2 except that neither Bob nor Wendy has valid enduring powers of attorney in place.
Bob loses capacity and is removed as an individual trustee under the trust deed for the Fund. The clock starts ticking and Wendy has six months from the date that Bob is removed to apply for an administrator to be appointed by the Queensland Civil and Administrative Tribunal (QCAT) and arrange for that person (probably Wendy) to be appointed as a trustee on behalf of Bob as a member.
Unfamiliar with the process, she contacts her Fund administrator and MCW to assist in the application to QCAT. MCW is successful in appointing Wendy as administrator for Bob. MCW and her Fund administrator work together to prepare the documents to remove Bob as a trustee of the Fund on the investment registers and confirm Wendy’s appointment as trustee in place of Bob.
Costs to engage MCW to prepare the above-mentioned documents – approx. $6,000.00 + exc GST.
GETTING IT WRONG
Failing to have the correct trusteeship of the Fund causes the Fund to cease to be a self-managed superannuation fund. This may ultimately result in the ATO removing the Fund’s complying status and triggering tax on the Fund assets at the top marginal tax rate.
The COVID-19 pandemic did many things. For our purposes, it emphasised the importance for travellers to have enduring powers of attorney in place before heading overseas.
The superannuation laws require that “central management and control” of the Fund remain in Australia. This may be infringed where one or more of the members have a prolonged stay overseas. If a short vacation results in a prolonged stay/temporary non-residence, the simple solution is for a member to remove themselves as a trustee/director and appoint their Australian resident attorney (appointed under an enduring power of attorney) as trustee/director of the Fund in their place.
Let us look at some further real-life scenarios:
Using the facts from Scenario 1, Bob and Wendy leave for the United Kingdom for a two-month vacation.
Whilst in the UK, a pandemic breaks loose and spreads across the world. The UK and Australia close their borders, meaning Bob and Wendy cannot arrange return flights to Australia and must see out the pandemic in the UK.
They have appointed one of their children, John, as an attorney under their enduring power of attorney.
Bob and Wendy contact their Fund administrator and MCW who work together to prepare documents to remove Bob and Wendy as directors of Bob and Wendy Super Pty Ltd and appoint John as director in both of their places. The “central management and control” test is now satisfied.
With the trusteeship of the Fund now sorted, Bob and Wendy can continue with their prolonged stay in the UK. John can liaise directly with their Fund administrator and MCW regarding the management of the Fund.
Costs to engage MCW to prepare the above-mentioned documents – approx. $1,000.00 - $3,000.00 exc GST.
SEPARATE ENDURING POWERS OF ATTORNEY
Sometimes it is appropriate to prepare a separate enduring power of attorney that deals specifically with the trusteeship of the Fund. This is relevant where a member wishes to appoint a different attorney for the Fund to their existing attorney, who may be appointed to deal with other financial and personal/health matters generally.
In Scenario 4, Bob and Wendy appointed John under a separate enduring power of attorney which specifically dealt with the trusteeship of the Fund. John is located in Brisbane and was comfortable taking on the role as director of the corporate trustee of the Fund. Bob and Wendy have a separate enduring power of attorney which deals with financial and personal/health matters, excluding the trusteeship of the Fund which appoints each other and all of their children as their attorneys.
DEALING WITH CONFLICT
As the law in this area is becoming more litigated and complicated, it increasingly important to deal with issues of conflict when drafting enduring power of attorneys, i.e. where the duties of the attorney to act in the principal’s best interest conflicts by the attorney receiving a direct/indirect benefit from a transaction.
For example, where your attorney directly or indirectly receives a benefit from dealing with your superannuation, they can hold to account for the receipt of that benefit. This may not be a desirable outcome and often causes, or worsens, a family conflict.
When preparing your enduring power of attorney, we encourage you to ask yourself:
1. Do I wish to allow my attorney to make contributions to my superannuation fund on my behalf?
Using the facts from Scenario 1, Bob has lost capacity and Wendy is the sole director, acting as director in her own capacity as a member, and as director in place of Bob.
Wendy has just sold their family home and has been advised by their financial planner to utilise the downsizer contributions for herself and Bob.
In Bob’s enduring power of attorney, he authorised Wendy to engage in any conflict transaction in relation to his superannuation and be specifically authorised to make contributions to the Fund on his behalf. Wendy can make the maximum downsizer contributions for herself and Bob notwithstanding any conflict.
2. Do I wish to allow my attorney to commence a pension or withdraw funds from my superannuation fund on my behalf?
3. Do I wish to allow my attorney to make or renew a binding death benefit nomination on my behalf?
With the ever-increasing changes to superannuation laws, it has become more important to consider the payment of benefits upon the death of a member. Every member should consider whether to give the discretion to their attorneys to renew and make a nomination on their behalf in respect of their superannuation.
Using the facts from Scenario 5, circumstances have changed since their last estate planning review with MCW. Wendy now wishes to amend her and Bob’s binding death benefit nominations such that their member benefits will be paid to their respective estates upon their death.
As Bob has specifically authorised Wendy, as his attorney, to enter into this type of transaction in his enduring power of attorney despite a conflict, Wendy can proceed with amending Bob’s nomination notwithstanding any conflict.
4. Do I wish to allow my attorney to act as trustee/director of my SMSF in my place?
If your answer to any of the above questions is yes, then you need to revisit your enduring power of attorney.
NEXT STEPS – APPROACHING A LAWYER
Seeing an estate planning lawyer does not have to be complicated or confronting. We ask our clients to call us to arrange an appointment and come with the answers to the following questions:
1. Who do you trust with your money?
This goes to the issue of who do you wish to appoint as your attorney for financial matters.
Under the law, an attorney appointed for financial matters can deal with any of your financial or property matters e.g. bank accounts (cash), real property (your house), superannuation, cars etc.
Due to the level of control your financial attorneys have over your assets, you need to ask yourself the question “could I give this person the login details to my online bank account and trust them not to misuse it”, “could I give the title deed to my house to this person and trust them not to misuse it”. This is the level of trust you need to have in each of your attorneys.
Come with three or four names in mind. We will discuss ‘backup’ attorneys if your primary attorney(s) cannot act. For example, you might appoint your spouse in the first instance, and if they cannot act you might appoint your two children and trusted family friend as your attorneys.
2. Who do you trust with your health?
This goes to the issue of who do you wish to appoint as your attorney for personal/health matters, as the people you trust with your health decisions are not always the same as the people you trust with your money.
Under the law, an attorney for personal/health matters can only act when you are no longer able to make decisions for yourself. Your attorneys for personal/health matters are empowered to decide where you live, day-to-day diet and dress, health care and access by visitors.
Again, for the reasons stated above, come with three or four names in mind.
It is useful to bring a copy of any existing enduring power of attorney. It not only acts as a starting point but may need to be revoked.
Don’t rely on idioms such as “it’ll be right” or “my spouse/children will sort it out” when it comes to managing your self-managed superannuation fund.
Proper documentation is simple and cost-effective in the long run.
Should you be interested in updating your enduring power of attorney, please contact us for an appointment.