There was a time when people chose to wind up their self-managed super fund well before they got “old”. But times have changed.
Now there are more funds, and many of them have older members with big balances. While there are good reasons to keep those funds going (often until both members die), this creates a new problem – how to manage the fund if the members live to a very advanced age.Join our newsletter
There are special rules for SMSFs that allow trustees or directors of the corporate trustee to be replaced by an attorney. Note that only an enduring power of attorney will do for this purpose.
At the right time, the attorney steps in as trustee (or director of the trustee company) in place of the member. That way the fund continues uninterrupted, the members remain the same but someone else (or several other people) takes over the work of managing the fund. They make decisions about where to invest, how to respond to legislative changes, what suppliers to use, et cetera.
This is still the right long-term approach. Anyone with an SMSF should have an enduring power of attorney just in case this is ever necessary.
But even if this is the best long-term solution, the great challenge has always been finding the right moment to make it happen. In cases where the attorneys are adult children, the handover can be tricky.
If it’s too early, there is a risk that the members (their parents) feel disempowered even though they made the decision. Getting older sees so many markers of autonomy taken away, so why make that unnecessarily worse?
However, if it’s done too late, it may be much harder to put into place and cause even more anxiety.
It would appear that there is a Goldilocks zone of “not too soon and not too late”. The tricky thing is how to judge that. Does it mean waiting until the parent either asks to be relieved of the responsibility and workload or is clearly declining mentally? And who wants to make the call about their parents’ capacity (or otherwise) to run the SMSF?
Perhaps a better approach would be to initially include the children (assuming they hold the enduring powers of attorney) as members and trustees – joining their parents as equals.
This raises all the usual challenges of control but in reality these are coming anyway. What it does potentially achieve is a gradual shift of power rather than a fixed transition date.
It gives the parents time to share their insights and experience on how things should be done and the adult children time to adjust to their new role. It also means that if the parents do eventually lose capacity, the alternative arrangements are already made. This is why it’s important that the enduring power of attorney documentation is in place from the start even if it’s not needed immediately.
For larger families (more than two children), this is where the new six-member fund rules might be a perfect solution. They provide more scope for all children to belong to the fund (assuming that’s the preferred outcome) and take on this transition.
This article was first published in the Australian Financial Review 1st September 2021.