My trustee has lost capacity – now what?

Latest ATO figures show that over 30% of SMSF trustees are over 70. Inevitably, as we age, we all face an increasing likelihood of mental impairment (for example dementia) which might impact our ability to fulfil our responsibilities as trustees.

So what will that mean for the future of the SMSF?

There won’t necessarily be a clear moment when someone loses capacity.

Capacity is context specific – someone may be very clearly less competent than they used to be but still capable of making many decisions on their own, including the financial and legal ones involved in running an SMSF.

That said, running an SMSF (even with help) could reasonably be considered a fairly complex thing to do, so it’s best to be prepared for the possibility that someone showing signs of decline may not be able to continue as trustee of their SMSF forever.

In fact, a person who is legally incapacitated can’t legally make decisions. This is why many SMSF trust deeds and constitutions (in the case of a corporate trustee) automatically remove any incapacitated trustee or director, as they are unfit and incapable of making the decisions required in the role.

The best preparation is having a valid enduring power of attorney (EPOA) in place that allows someone else (the attorney) to make decisions for the impaired member (the donor).

But while this document will allow an attorney to make decisions and sign financial documents on behalf of the donor for a range of personal financial matters, it is more complicated in relation to the role of a trustee/director of an SMSF.

The attorney needs to be formally appointed in place of the original trustee or director. Fortunately, the SMSF rules allow this to happen – the normal requirement for all members to also be trustees / directors provide an exception where a member is replaced by their attorney.

Only once they have been properly appointed can the attorney do things like sign the financial statements, lodge returns, make investments and pay benefits. Until then, they can’t do anything the SMSF trustee would normally do.

What if there is no one suitable to replace an incapacitated SMSF Trustee?

In cases where there is no one suitable to act, the trustee’s family or adviser would need to apply to the relevant state’s Civil and Administrative Tribunal to have a financial administrator appointed.

The Tribunal would consider a range of factors including the complexity and value of the SMSF, the level of business acumen and skill required and the suitably of any individuals willingly to undertake the role.

The Tribunal may elect an independent party to be appointed due to the risk of elder abuse, existing family conflict, or risk of “conflict transactions.” In such cases, the relevant Public Trustee (based on the relevant state) may be appointed as their financial administrator. The Public Trustee (as legal personal representative) would then manage the process to be appointed as a new trustee or director.

The trustee rules for SMSFs (including situations where a member is replaced by their attorney) are covered extensively in Heffron’s Super Companion.