Estate Planning / Sep 13, 2021

Trustees need to plan for Tragedy

Alex Polorotoff
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When planning for the difficult event of an SMSF member becoming incapacitated, there are a number of considerations. One of these important considerations is appointing an attorney to act on behalf of a principal, when that member can no longer fulfill the requirements to act as an SMSF trustee.

Typically, all members of an SMSF must be trustees or directors of the corporate trustee and vice versa. The SIS Act also has provisions to allow other people to act as an SMSF trustee, such as a member’s Legal Personal Representative.

Where a member can no longer act as trustee, appointing a general Power of Attorney to act on their behalf is not sufficient for an SMSF, as they will no longer meet the definition of an SMSF. This is because a general Power of Attorney does not provide the attorney with the required powers. Therefore, an Enduring Power of Attorney (EPOA) is required (read Abra’s article EPOA in SMSFs). An EPOA empowers an attorney to make decisions on behalf of the principal as well as allowing them to be appointed trustee.

In SMSFR 2010/2, the ATO states that to continue to meet the definition of an SMSF, the current trustee must resign or be removed, then formally be replaced by the EPOA. The EPOA then needs to consent to act as trustee, complete the ATO trustee declaration and any other relevant documentation. This allows the EPOA to act as a trustee in their own right.

Most new SMSF trust deeds and company constitutions will have a clause stating that, if a trustee or director lacks the capacity to act in that role, they should be removed.

Can an EPOA sign financial statements and the SMSF annual return?

The same process would apply to a common scenario, where trustees of an SMSF are going overseas for an extended period, so appoint an EPOA to act as trustee of their SMSF on their behalf, so that the annual financial statements and SMSF annual return can be signed and lodged.

Planning for Death

It is also important to consider who should be a member’s EPOA and executor when undertaking estate planning. The powers granted to an attorney by an EPOA immediately cease upon the death of the principal. This can cause issues with the SMSF no longer meeting the definition of an SMSF, if the trustee who held the EPOA is not also the executor of the deceased’s estate. This breach needs to be rectified within six months by removing the trustee who held the EPOA and appointing the executor.

Changing the EPOA

There may be instances where a principal wants to remove the existing attorney and appoint a new one. This could be due to a breakdown in trust, they are no longer suitable or a change in their relationship. It’s important to note that generally, separation or divorce does not automatically terminate an EPOA.

In order to revoke an EPOA, the principal must have legal capacity to do so. The revocation then needs to be officially documented. These requirements could vary from state-to-state, including how you register the revocation. This might also be a good time to review if another attorney should be appointed. Finally, the attorney who has been removed should be notified in writing.

Regularly reviewing the SMSF trust deed

These considerations highlight the importance of regularly reviewing and, if required, updating the trust deed for an SMSF. The deed is effectively the ‘rule book’ for operating an SMSF and, on numerous occasions, the ATO has indicated how vital it is that the deed gives the necessary powers to trustees to act in accordance with the superannuation laws and regulations.

SMSF trustees cannot rely on the superannuation laws and regulations to govern what powers they have. The laws simply clarify what their obligations are as trustees and what action is permissible.

It is therefore vital that the trust deed reflects the current laws and regulations. For example, some older trust deeds may not permit the trustee of an SMSF to enter into an LRBA. Or consider a trust deed which hasn’t been updated for the change to the SIS Regulations from 1 July 2007, which require pensions to meet minimum pension standards. If they fail to meet these standards, because the deed doesn’t provide for these provisions, they may not be able to claim ECPI.

There are also instances where trustees may need to appoint another person to act as a trustee, such as incapacity. Some trust deeds are silent on how this appointment should happen. It is important new trustees are appointed, as per the governing rules in the deed, to avoid future disputes from other parties, who may have a financial interest to challenge their appointment in the future.

If an SMSF trust deed was prepared a while ago, it might be time to purchase a new deed to ensure the governing rules of an SMSF are up-to-date with the current superannuation laws and regulations. It also gives trustees peace of mind to know that the transactions they are entering into are permitted by the deed.

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