Top SMSF advice if dementia is on the horizon

GOOD ADVICE: Learn the importance of Enduring Power of Attorneys to SMSFs.
GOOD ADVICE: Learn the importance of Enduring Power of Attorneys to SMSFs. Highwaystarz-Photography

SELF Managed Super Fund specialist Monica Rule talks about the confronting problems around dealing with a person who has dementia and owns a SMSF.

There are many articles that explain what a Self Managed Superannuation Fund member should do to guard against the unfortunate things which could prevent them from managing their SMSF.

These articles usually recommend putting in place an Enduring Power of Attorney so that the member can step down as an individual trustee (or a director of the corporate trustee) and the person with the Enduring Power of Attorney appointed to manage the SMSF.

An Enduring Power of Attorney is a legal agreement that enables a person to appoint a trusted person to make superannuation decisions on their behalf. It is made by choice and executed by anyone over the age of 18 who has full legal capacity.

However, if an SMSF member is already suffering from dementia they do not have the full legal capacity to understand the implications of giving an Enduring Power of Attorney to another person. Therefore, an Enduring Power of Attorney cannot be put in place.

Family members may encounter situations where their loved ones suffering from dementia (normally an elderly mother or father) has an SMSF with quite a lot of assets, but no one has an Enduring Power of Attorney to take over the management of the SMSF.

What this means is the SMSF no longer meets the legal structure of an SMSF. Under the superannuation law, all members must be either an individual trustee or a director of the corporate trustee of an SMSF. A member with dementia has a legal disability so they are unable to perform these roles and therefore their SMSF does not comply with the legal structure of an SMSF.

When a superannuation fund no longer meets the legal structure of an SMSF, it has six months to restructure, employ a licensed trustee, or roll money into a retail superannuation fund and wind up the SMSF. Once the six month time period has passed, the SMSF becomes a non-complying superannuation fund and cannot roll money into another superannuation fund. However, the Tax Office does have the ability to treat a superannuation fund as an SMSF beyond the six month time frame if you approach it for an extension.

Where there is no Enduring Power of Attorney put in place, the only option that is available is for someone (usually a family member) to apply to the Civil and Administrative Tribunal in their State - for example QCAT in Queensland, VCAT in Victoria, NCAT in NSW, SAT in WA - for an administration order or its equivalent in their state. The tribunal is set up for the purpose of dealing with the financial and personal affairs of an incapacitated person.

When the tribunal has an application for an administration order, it will need to first determine that the SMSF member is unable to manage their affairs or make reasonable decisions about financial or superannuation matters. Medical evidence that supports the SMSF member's mental status will need to be presented.

If the tribunal is satisfied that it can, and should, make an administration order, it will consider who should be appointed as the administrator, whether that appointment should be subject to any conditions or restrictions, what authority should be given to the administrator, and when the order should be reviewed.

The tribunal may appoint a family member. If there is no-one known to the SMSF member willing and suitable to perform the function of an administrator, then the tribunal may consider appointing someone such as the Public Trustee (WA) or its equivalent in the member's state.

For a person to be appointed as an administrator, the tribunal has to be satisfied that he or she:

  • is over 18 years of age
  • will act in the SMSF member's best interest; and
  • is otherwise suitable and willing to act as an administrator.

The tribunal will have regard to:

  • the compatibility of the person
  • the wishes of the SMSF member
  • whether the person will be able to perform the functions of an administrator; and
  • whether the person has a conflict of interest with the SMSF member.

The administrator must be able to:

  • carry out the tasks required to manage the financial and superannuation affairs over which the administrator is given authority; and
  • keep appropriate records and to report to the public trustee or its state equivalent as required (at the time of appointment and then once yearly after that).

Administrators are accountable for the decisions they make and must keep accurate records of all transactions. They are required to submit annual accounts to the public trustee (or its state equivalent) in the prescribed format. Accounts must be submitted for all transactions relating to the areas that are subject to the administration order. Administrators may be held personally liable for losses to the member's SMSF.

Once an administrator is appointed, the person appointed can act as an individual trustee or director of the corporate trustee for the SMSF and manage the SMSF.

While it is good that this process is available, SMSF members really should have better risk management strategies in place.

To avoid having your loved ones go through this rather arduous process, every SMSF member should implement an Enduring Power of Attorney for someone to act on their behalf in the event they are no longer able to manage their SMSF.

Monica Rule is an SMSF Specialist and author of The Self Managed Super Handbook - Superannuation Law for SMSFs in Plain English -

Topics:  finance financial advice general-seniors-news legal monica rule self managed super funds smsf

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