At the moment the number of self-managed superannuation funds is increasing by 3,500 a month. Of this 70% of funds have individual trustees.
A lot of trustees are unaware that if a trustee becomes incapacitated, then they can no longer act as trustee for their SMSF.
The same goes with being a Director of a corporate trustee. In this case where a trustee becomes incapacitated, they must take their benefit as a lump sum payment and exit the fund in order for the fund to remain complying.
This can be very difficult if say the funds’ holds non-liquid assets such as property or units in unlisted unit trusts. If the fund has borrowed money to purchase a related party asset such as a commercial property this can also cause significant problems for the trustees and the family businesses.
To avoid this type of problem, we recommend all trustees have enduring power of attorneys. It should be noted that multiple members of a fund can execute an enduring power of attorney in respect of the same individual representative.
This is particularly good if members of an SMSF are going to be non-resident for a period of time, they can appoint a person to act on their behalf and the fund still complies with the member residency test.
If you are in your 30s and think that you do not need this, consider the following example.
James 38 and Jenny 36 are trustees of their personal SMSF the J & J Superannuation Fund. They are keen property investors having two negatively geared properties in their own names and one in their SMSF.
This property represents 80% of the funds’ assets. James and Jenny are very active people and enter cycling competitions regularly. Recently James entered a competition but unfortunately was hit by a vehicle and has been in a coma for a month.
His prospects for full recovery are poor.
Both members do not have enduring power of attorney. Under the SIS legislation both trustees are required to make decisions on behalf of the fund. As one member is now unable to do so, that member must be removed from the fund to avoid non-compliance.
The fund does not hold enough cash to pay a lump sum for James so the property will now need to be sold in order to pay him out. If the market is bad, the fund could have significant losses.
Jenny has then 6 months to appoint a new trustee to replace James, appoint a corporate trustee or wind up the fund.
If James and Jenny had an enduring power of attorney, they could keep the fund and James could remain a member.