The last thing an SMSF member wants to think about at Christmas time is death or incapacity – and particularly their own.
Unfortunately, those events can happen to anyone, particularly when enjoying something fun and exciting (and a bit dangerous) as people often do when they go away on holidays. Skiing, hang-gliding, scuba diving – such activities can carry with them the risk of serious injury or even death.
We usually don’t think twice about getting travel insurance to cover our luggage and any transport or accommodation mishaps. But there is equally important ‘cover’ we can put in place that will help our families – and also help them to help us – should the unforeseen occur. Yes, we are talking about the ‘Fabulous Four’: an enduring power of attorney (EPOA), an appointment of enduring guardian, an up-to-date will and a binding death benefit nomination (BDBN).
An EPOA appoints one or more trusted people to look after your financial affairs if you lose your mental capacity. This could be due to an accident or sudden illness, such as having a stroke.
If an SMSF member loses capacity without having an EPOA, the complying status of their SMSF may be at risk, since section 17A of the Superannuation Industry (Supervision) (SIS) Act 1993 requires each member of an SMSF to also be a trustee, or a director of the corporate trustee, of the SMSF. As many SMSF trust deeds and company constitutions automatically disqualify a person from being a trustee or a director of a corporate trustee upon losing mental capacity, the fund could be in breach of the SIS Act.
However, under sub-paragraph 17A(3)(b)(ii), a legal personal representative (LPR) who holds an EPOA granted by a member may be a trustee of the SMSF, or a director of the corporate trustee of the SMSF, in place of the member without causing the fund to fail to satisfy the definition of an SMSF.
Therefore, putting an EPOA in place for each member of an SMSF is essential in order to be able to take advantage of this exception.
Remember also that the trust deed of the SMSF must authorise an EPOA to act as trustee in place of a member, otherwise where the SMSF has individual trustees, the appointed attorney may still not be able to be added as a trustee in place of the member, leaving the complying status of the fund at risk. Therefore, a review of the SMSF trust deed will also be required.
Besides financial decisions, other important personal and lifestyle decisions will need to be made for the member. An enduring attorney for financial purposes cannot make these decisions. Therefore, SMSF members also need an appointment of enduring guardian, which appoints one or more trusted people to make decisions such as where you live, what healthcare and other personal services you receive, and consenting to the carrying out of certain medical or dental treatments on you.
If an SMSF member dies, neither an EPOA nor appointment of enduring guardian will be of any use as they cease on the death of the appointor. This is where having an up-to-date will is crucial as a will operates after the death of a member.
One important function of the will is to appoint the SMSF member’s executor, who is the LPR of the deceased member. Again, the SIS Act provides an exception to the general rules regarding trusteeship of a complying SMSF.
Section 17B of the act provides that a superannuation fund does not breach the rules if a fund member has died and their LPR is a trustee of the fund, or a director of a corporate trustee of the fund, in place of the member during the period from when the member died and ending when death benefits commence to be payable.
However, unless the deceased member’s superannuation death benefits are paid to their estate, their will does not govern the distribution of their death benefits. This brings us to the last but not least of the ‘Fabulous Four’ – a BDBN. Subject to the terms of the SMSF trust deed, only a BDBN can give the member certainty over what will happen to their death benefits. Depending on the trust deed, the BDBN can also be non-lapsing in that it does not need to be renewed every three years.
Importantly, the nominees must be SIS dependants, namely the member’s spouse, children of any age, and people with whom the member had an interdependency relationship. However, the member can benefit other people (such as their grandchildren) by nominating their estate, so that their will can direct their superannuation death benefits accordingly, perhaps even via a testamentary discretionary trust for greater tax efficiency and asset protection benefits.