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Estate Planning

Being prepared for loss of mental capacity vital

Neglecting to plan ahead to ensure SMSFs can continue if trustees lose their mental capacity can result in catastrophic financial consequences, a lawyer has warned.

SuperCentral superannuation and estate planning special counsel Brian Hor said failing to safeguard SMSFs in case a trustee loses mental capacity due to dementia or suffering a stroke can result in the fund’s assets and operations being frozen, resulting in losses from being unable to buy or sell investments at the right time.

Furthermore, control of the fund could fall into the wrong hands or into the hands of strangers, or the SMSF could face the loss of complying fund status, with disastrous tax consequences, Hor said.

He suggested trustees should appoint an enduring power of attorney they trust to handle their financial affairs and as trustee of the fund in place of the original trustee.

“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,” he said.

Trustees should provide written instructions to the appointed enduring attorney and other trustees or directors of the corporate trustees to inform them the trustee wants the enduring attorney to be appointed in their place and set out their roles and responsibilities and instructions on how to deal with particular fund investments, he said.

Trustees should appoint “back-up” enduring attorneys who are younger to ensure they are also not at risk of losing mental capacity due to dementia or other reasons, he said.

He also suggested putting in place a non-lapsing binding death benefit nomination and updating the trust deed if necessary for the SMSF to allow the trustee 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,” he said.

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