The reality of mental incapacity later in life needs to be urgently addressed by all SMSF trustees and practitioners to protect against complex scenarios and outcomes, an SMSF expert has warned.
At the Institute of Public Accountants SMSF Retreat in Noosa today, The Self-Managed Super Handbook author Monica Rule said: “There are over 350,000 Australians living with dementia at the moment. With 42 per cent of SMSF members aged 55 and over, the threat of dementia is a looming issue for many ageing SMSF trustees.
“When there is more than one member in the fund, the situation isn’t as bad since there are other members that can look after the fund, but remember 20 per cent of SMSFs are single-member funds – the second highest amount after two-member husband/wife funds.
“The best thing is prevention through an enduring power of attorney (EPOA). Once a member has dementia, it’s too late because you cannot now try to put one in place.”
Rule said trustees must consider giving someone an EPOA to prepare for the day they can no longer manage the SMSF and have that person step in.
“If they don’t meet a condition of release, they can either retain the fund, wind it up or convert the fund into a small Australian Prudential Regulation Authority fund, also known as a SAF,” she said.
“So there are options to keep in mind for SMSF members with dementia.”
However, where there is a trustee with dementia and no consent via an EPOA, she noted the responsibility will be passed to the relevant state Civil and Administrative Tribunal, which is a government body set up for the purpose of dealing with the financial and personal affairs of an incapacitated person.
“The tribunal will determine the mental state of the member based on the medical evidence presented,” she said.
“And it will consider who should be appointed, however, if a person can’t be decided upon, the tribunal may appoint a family member or the public trustee if no one else is suitable.
“While this option is available, it’s a long and drawn-out process. So it’s better that your SMSF clients do have an EPOA appointing at least one other person to look after the fund for them if they are not in a position to look after it.”
She also underscored that once an administrator for the fund is appointed, the person can act as a trustee or director of the SMSF and resume managing the fund.
“Administrators are accountable for the decisions they make and must keep accurate records of all transactions,” she warned.
“They are required to submit annual accountants to the public trustee and may be held personally liable for losses to the member’s SMSF.”