10 Ways to Protect Your SMSF From Loss of Mental Capacity

If you have a self-managed superannuation fund (SMSF), you need to plan ahead to ensure that it can still keep going if you lost mental capacity due to dementia (or other reasons such as suffering a stroke). Otherwise, the fund’s assets and operations could be frozen, resulting in losses from being unable to buy or sell investments at the right time, control of the fund falling into the wrong hands (or into the hands of total strangers), and even the loss of complying fund status with catastrophic tax consequences.

So, before the unthinkable happens to you, here are 10 things you can do to protect your SMSF from your incapacity: 

1. Talk to your financial adviser about what you want to see happen with your fund if you lost mental capacity, in terms of things such as who should be in control, what should happen in terms of investment strategy and ongoing management of the fund, whether the fund should be wound up and your member benefits rolled out into an APRA fund, what should happen in terms of your death benefits, and so forth. Your adviser can give you advice and co-ordinate getting further assistance from an accountant and/or a lawyer where necessary.
2. Put into place an Enduring Power of Attorney, to appoint someone who you trust to be able to handle your financial affairs and to be able to be appointed in your place as a trustee of the fund (or as a director of the corporate trustee).
3. Check the trust deed for the SMSF to ensure that it allows for your Enduring Attorney to be appointed in your place as a trustee of the fund or as a director of the corporate trustee (and if it doesn’t, then have it updated accordingly).
4. Put into place written instructions to your appointed Enduring Attorney and the other trustees or directors of the corporate trustee to let them know that you want your Enduring Attorney to be appointed in your place, and what their roles and responsibilities will be and what specific instructions you may wish to give to them regarding things such as dealing with particular fund investments, etc.
5. Appoint one or more substitute or “back up” Enduring Attorneys – especially if you appoint your spouse as the first choice, as they may be the same age as you and therefore also at risk of developing dementia at the same time as you do, in which case the substitute attorneys should be younger than you (such as one or more trusted children of yours).
6. To help prevent the investment strategy of the fund going off the rails after you lose capacity, put into place an investment strategy that clearly sets out what should happen and how it should be implemented, both before and after one or more members of the fund lose capacity, and ensure that it binds all the fund trustees. 

   “The fund’s assets & operations could be frozen”

   “You need to plan ahead!”

7. Put into place a corporate trustee rather than individual trustees, as this will make things much easier if you lose capacity. For instance, if you lose capacity there is no need to change the ownership of the fund assets (which can be a costly and time-consuming exercise) as they will be in the name of the corporate trustee so that all that needs to happen is that you are replaced as a director.
8. If you are a director and shareholder in a corporate trustee of the fund, check the constitution of the company to make sure that you’re Enduring Attorney can exercise the voting power on your shares so that they can be appointed as director in your place.
9. Put into place a Non-lapsing Binding Death Benefit Nomination (and if necessary update the trust deed for your SMSF to allow you to do this). Otherwise, if you lose capacity and your nomination lapses, you will not be able to renew it and the trustee of the fund will have the discretion to pay your death benefit – perhaps to someone you did not intend to receive it.
10. Make sure your Will is properly updated because once you lose capacity you can no longer make or change your Will. This can be critical in the context of your SMSF, as the only way you can give your super to persons who are not eligible to receive benefits directly from your SMSF is via your Will. For instance, unless you were in an interdependency relationship with them or they were your financial defendants, you cannot nominate grandchildren to receive a death benefit directly from your fund – instead, you have to direct the death benefit to your deceased estate and then make a gift of the death benefit to your grandchildren under your Will.

 Brian Hor, Special Counsel, Superannuation & Estate Planning, SUPER Central