At some point, illness, ageing or accident may incapacitate one or more members of an SMSF As a result, they may lose the capability to manage their role as trustee.
Preparing forth is eventuality well in advance will enable membership to continue, regardless of capacity.
1 Appoint an Enduring Power of Attorney
Every SMSF member should appoint a Legal Personal Representative (LPR) under an Enduring Power of Attorney (EPoA).
Should a member (the EPOA ‘donor’) lose capacity and be unable to fulfil their role as director or trustee, their LPR may be able to step into this role, ensuring the ongoing operation of the fund.
Ideally, an LPR should understand the requirements of taking the place of an SMSF trustee and have sufficient time to devote to the task. Although the LPR would ‘stand in’ for the trustee/director, they would assume full trustee responsibilities.
2 Update the SMSF trust
Ideally, the SMSF trust deed should have enough flexibility to allow for the appointment of an LPR as a replacement director (or trustee, in the case of an individual-trustee fund) in the unhappy event that a member becomes incapacitated.
However, if the deed does not permit the appointment of others, such as an LPR, under the exceptions to the standard trustee/member rules, it is vital the deed be updated.
If this does not occur and a member becomes incapacitated, their benefits may no longer be able to remain in the SMSF and those benefits may have to be transferred to a public-offer fund.
3 Implement the best structure to enable LPR appointment
The third step in preparing for incapacity is to ensure the trustee structure allows for an LPR to smoothly and quickly replace the incapacitated member. As the table below indicates, a corporate trustee structure (compared with an individual-trustee structure) significantly simplifies this process.
The table below also looks at what happens with each of these structures in the event of an LPR not being appointed (if a member has permanently lost capacity, it is too late to appoint an LPR).
The greatest difficulties emerge for individual-trustee funds, where an LPR has not been appointed. Conversely, a corporate trustee where an LPR has been appointed allows for the easiest possible transition when needed.
