Financial Planning

Transaction complexity linked to capacity

trustee capacity

The ability of an SMSF trustee to make rational decisions can be linked to the complexity of a particular action and capacity should not be assumed.

SMSF advisers concerned with the mental capacity of a trustee need to consider the complexity of any transaction as not all events will be the same and may exclude some clients from acting, according to a superannuation lawyer.

Townsends Business and Corporate Lawyers superannuation online services division managing solicitor Jeff Song said the capacity of a person to engage with a financial transaction was often linked to the complexity invovled and this was an issue for SMSF advisers and clients.

“The more complex the transaction the higher the risk that a person suffering some level of mental capacity may not be competent in respect of the transaction,” Song noted during a webinar late last year.

“Legal capacity is often heavily dependent on somebody having the mental capacity to understand the transaction.

“So, if a transaction is very complex a person would need a very good level of capacity for them to have the necessary mental capacity and therefore the legal capacity.

“Generally, SMSFs are complex but that complexity depends on what types of investments the fund has and that varies between SMSFs, so it is really important that the decision is made for that person and particularly for that transaction.”

He added the loss of mental capacity may not be permanent and could vary over time or due to circumstances.

“Just because a person lacks mental capacity at one point of time does not mean that mental capacity is forever gone and an example of this is someone with a mental illness.

According to Song situations where a person is taking prescribed medication is a case in point with the individual having full mental capacity while they are complying with their medicated schedule but deteriorating when this is no longer happening.

“Another example is stress and if a person is under a huge amount of stress at a point in time you may not be able to say that because this person is an intelligent person they would have capacity at that relevant time,” he said.

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