Enduring powers of attorney (EPOA) can create risks that an SMSF gains an unsuitable trustee under ill-defined terms related to incapacity, which can be avoided if this role is defined within the SMSF trust deed, according to an SMSF legal firm.
Hill Legal principal Chris Hill said risks related to the use of an EPOA arose because superannuation laws do not define when a person has lost the capacity to be an SMSF trustee and this could be exploited to replace a trustee with a legal personal representative who would gain all the powers previously held by the trustee.
“The Superannuation Industry (Supervision) (SIS) Act 1993 does not define when a person suffers from a legal disability or mental Incapacity,” Hill said in a recent briefing to clients.
“The legal form of the term is well known in trust law to include a person who is bankrupt or an infant, but as far as cognitive impairment is concerned, it [the SIS Act] lacks any legislative definition of the type defined in the Powers of Attorney Act.”
As a result of this lack of definition, the firm stated an individual holding an EPOA could decide a trustee suffers from cognitive impairment and have them removed as trustee, leading to disputes around cognitive impairment without any clear reference to a benchmark legislative test for the condition.
“This is the first risk of abuse: of a member being thrown out of the office of trustee by an over-concerned or belligerent attorney, possibly with nefarious intentions,” Hill said.
He said this risk increased because in stepping into the role of trustee, any powers or restrictions contained in the EPOA were no longer binding on the attorney and instead they assumed any powers or restrictions allowed to the trustee as defined by the terms of the trust deed.
“This includes all the powers that the member had as trustee concerning the decision-making of the fund and management of the fund’s assets and possibly complete control of the fund where the incapacitated member has the largest account balance and when decision-making is based on the size of an account balance,” he said.
He pointed out an EPOA could still be used with an SMSF, but its inclusion within the trust deed would become binding on any attorney who steps into the role of trustee and could be used alongside a non-SMSF EPOA to manage a member’s non-superannuation assets.
“By making the EPOA a ‘Special Rule’ of the fund and a ‘Paramount Document’, we can carve out and specify which powers, functions and restrictions the EPOA has when stepping into the office of trustee, including various decision-making options,” he said.
He noted these powers could range from express powers, which an attorney can undertake without any restriction other than what is provided in the fund’s deed, such as basic administrative functions, to consent powers, which require the approval of a third party, such as a financial adviser or accountant, and prohibited powers, which are normally available to a trustee but remain unavailable to any attorney acting as trustee.
“What restrictions and powers that apply to an EPOA in each of these categories can be crafted into the EPOA document that forms part of the rules of the fund as a means of providing, at the very least, the opportunity for an adviser to supervise or manage the activities of an EPOA, or, at most, to avoid the risk of financial abuse to the fund member’s assets when they step down from the office of trustee.”
The issue of mental capacity is also being examined by the ATO which is using its compliance tools to ascertain if a trustees are still capable of running their SMSF.
