How do SMSFs & Powers of Attorneys work
A POA can allow a person (attorney), you appoint, to step into your shoes to make financial decisions on your behalf such as operating a bank account, paying bills, buying and selling shares and property. If specified in the POA it can also allow the attorney to make financial decisions for a member of a SMSF.
A POA can be granted for a specific period and can be restricted to an event such as signing documents for the sale of a property when you are overseas. A POA ends in accordance with the agreement or ends when you cannot make legal decisions after losing capacity. There are different rules in every state for how Powers of Attorney work, to find out more see the Compass site.
Enduring Power of Attorney (EPOA)
An EPOA extends a POA to a person who has lost capacity such as a person developing dementia.
An EPOA is a crucial tool for an SMSF to ensure continuity of the SMSF when a member becomes incapacitated or when life events happen. The superannuation laws allow a person who is appointed as an attorney under an EPOA to step in as a trustee or a director of the corporate trustee when a member is unable to or doesn’t want to continue that role. Situations where this may arise include a member going overseas for an extended period of time, the member doesn’t want to make trustee decisions anymore, the member becomes ill or becomes incapacitated. However, the EPOA will cease on the member’s death unless it is revoked prior to this event.
There are a lot of legal issues that need to be addressed when establishing an EPOA. It would have to include instructions in relation to your SMSF such as who the attorney will be, when the trigger to be appointed arises, deciding on any limiting power the attorney would have and possibly including instructions about death benefit nominations and the attorney must sign and accept the appointment.
Dementia is an example of losing capacity and is a major issue in today’s modern world as our population ages. A member of a SMSF who has lost capacity can no longer legally act as a trustee, or a director of a corporate trustee and must be removed.
So what! Can’t the remaining trustee just deal with the management of the fund and payout or roll over the member’s super balance. After all the other member is my husband and I know what he wants.
Well no. That is not how it works, especially as a lot of SMSF trust deeds and company constitutions, automatically remove a trustee or director when they can no longer legally make decisions.
However, the fund has 6 months to restructure when this happens or appoint a regulated superannuation entity licensee (external APRA approved trustee) or be wound up. This is a very short amount of time to get your house in order.
An enduring power of attorney (EPOA) is one of the best solutions. This means advance planning to ensure a member of a SMSF has put one in place before they lose capacity. An EPOA cannot be put in place after the loss of capacity has occurred.
An EPOA only covers you personally. The superannuation laws allow an attorney under a binding EPOA to step into your shoes as a trustee or a director of a corporate trustee, but you must be removed as a trustee or director and your attorney appointed in that role. The new trustee/director acts and signs in their own right and not on behalf of the member. When an attorney is appointed as a trustee/director, they must act in the interests of all members not just the member who appointed them.
Subject to the EPOA an attorney can make decisions for you in relation to your SMSF such as requesting to start a pension or withdraw super, and they can sign documents on behalf of the member.
Decisions about changing or establishing a binding death benefit nomination (BDBN) are not as clear cut. The SMSF trust deed would have to authorise an attorney to have the power to do this and the wording of the EPOA would need to be explicit, especially if the BDBN benefits the attorney which could be the member’s spouse.
Not having an EPOA is far more problematic. Not having an EPOA can cause a high amount of stress and possible litigation, if one of the trustees loses capacity, and there is no plan in place to protect your SMSF. An alternative is to seek an application from the appropriate state tribunal to have an administrator appointed, who is also able to be appointed as a trustee of a SMSF. However, it can be very costly, complex and time consuming to pursue this path. The recommended course is, in most cases, to establish an EPOA for each member of the fund.
Please seek advice from your SMSF Specialist or legal advisers before establishing an EPOA to ensure it will provide the outcome that you want.