SMSF trustees must take appropriate action to ensure a fund’s complying status if they lose mental capacity, a law firm has warned.
Townsends Business and Corporate Lawyers solicitor Jeff Song said all members of an SMSF must be individual trustees or directors of the corporate trustee, but a person with a legal disability, such as mental incapacity, cannot hold either position.
If a trustee loses mental capacity, either due to a deteriorating health condition or through an accident, action needs to be taken within six months for the fund to comply with the above requirement and maintain the fund’s complying status, Song noted.
“The superannuation law provides that an enduring attorney of a member who lost mental capacity may be a trustee of an SMSF (or director of the corporate trustee) in place of the member,” he said.
“However, it is important to understand that this is not an automatic replacement and is not always as easily done as some people may believe.”
He noted the process requires the formal appointment of the enduring attorney as the replacement trustee, as well as the retirement of the current trustees in accordance with the trust deed and relevant laws.
This requirement for formal appointment and retirement also applies to any director of a corporate SMSF trustee, he added.
“Accordingly, preparing for loss of legal capacity requires more than just an enduring power of attorney,” he said.
“The situation would be much more complicated and costly if the trust deed does not allow an alternative decision-maker to formally appoint replacement trustees in the event of both trustees/members losing mental capacity.”
According to Song, if the trust deed only allows the current trustees or members of the SMSF to appoint replacement trustees, this appointment power can no longer be exercised if they all have lost mental capacity. They would need to apply to the courts, which can be an expensive process, he said.
