In a monthly column to assist trustees, specialist Meg Heffron explores major issues relating to managing your SMSF.
For regular readers of this column, I promise I will stop talking about future-proofing your SMSF very soon.
But questions on last month’s article and several recent discussions with clients highlight how tricky it can be to explain how powers of attorney can help plan for aging in an SMSF.
It’s an important topic no matter how young, fit and healthy we may feel.
A quick re-cap
The term 'power of attorney' is generally well understood. It involves one person (the donor) giving some important legal powers to someone else (the attorney). The attorney can stand in and do whatever the donor could normally do for themselves when it comes to a wide range of financial matters.
For example, I (the donor) could grant power of attorney in favour of my son (the attorney) and he could sign contracts on my behalf to sell my house. The key here is that he is standing in for me and doing something in my place. He must be careful that he’s acting in my interests and not his own. Other than that, he can do pretty much anything I could do for myself when it comes to financial matters. (If I wanted him to also make decisions about my health, I would need different documents.)
Normally, a power of attorney ends if the donor cannot make decisions for themselves (for example, they have dementia). But a special power of attorney – an 'enduring' power of attorney – continues even if the donor becomes incapacitated.
There are some things my attorney cannot do for me no matter what type is in place. For example:
- I am a qualified actuary and can sign certain certificates that need an actuary. The fact that my son holds an enduring power of attorney for me does not allow him to do that,
- I am a director of the company that runs my business. He cannot fulfil my duties as a director just because he holds that power of attorney – a power of attorney for me only covers my personal affairs. (The company itself could grant a power of attorney but that is something else entirely.)
- If I was the trustee of a trust (individually rather than via a company), he cannot do that for me either.
How are enduring powers of attorney helpful for SMSFs?
So far, powers of attorney are not sounding particularly helpful for SMSFs. However, running alongside these rules about powers of attorney we have entirely separate legislation about self-managed funds.
That legislation says that if you belong to an SMSF, you have to also be a trustee (or director of the company that is the trustee). The idea is that if you are going to step into the world of running your own super, you really must run it.
There are a couple of exceptions. If you have someone who holds an enduring power of attorney, they can be a director or trustee instead of you. This sounds just like my son stepping in for me and selling my house, but it’s completely different.
If my son were allowed to use his power of attorney for my SMSF just like he can use it to sell my house, I would remain a director and from time to time he would sign documents “as me”. But that’s not allowed – fulfilling my duties as a company director is one of the things my attorney can’t do for me.
The rules for SMSFs instead allow me to step aside entirely (for example I would resign or be removed as a director) and have him take my place (he would be appointed as a director). Normally this would be a problem – I’m a member but not a director. But there is a special carve-out that says that’s fine, as long as I’ve been replaced by someone holding an enduring power of attorney for me.
My son would be a director of my SMSF trustee and have the full responsibilities and powers as a director just as if it was his own SMSF.
Legally, this different approach is profound. For a start, he doesn’t have to fulfill his duties in line with the power of attorney anymore. For example, I have two sons. My enduring power of attorney requires them to make decisions together. To sell my house, they’d both have to agree. But if only one of them became the director of my SMSF trustee, then he (and he alone) would be making decisions about my SMSF. He could not defer to his brother or share decision-making with his brother.
He would also – like any other trustee – have to act in the best interests of all members, not just me. The fact that he’s only there because of me is irrelevant. He’s not my “representative”, he is a director of a company charged with running an SMSF for all its members.
It’s different in a practical sense too. On documents, for example, my son’s name would appear as the director and he would sign in his own right. He’s not signing ‘as attorney for mum’. In contrast, if he was signing something on my behalf as a member (for example, a request to start a pension or withdraw my super) he would be signing as attorney for me as an individual.
Some important points to make this work
Often an enduring power of attorney only comes into effect if the donor becomes incapable of making their own decisions. Normally, that makes sense – you might not want anyone to have the power to control your life until you cannot do it yourself. But that will mean your attorney can’t be the trustee of your SMSF while you are still mentally able. Anyone intending to use this as a mechanism to allow (say) an adult child to be the trustee of their SMSF would need to make sure the power had been activated.
It's also possible to impose limits that only allow that person to be the trustee of your SMSF – so they can’t control decision-making in other areas.
In my SMSF, it’s fine for just one son to be the director of the trustee or both. The SMSF rules will be satisfied either way. I might prefer both (so that indirectly they are still making decisions jointly) but there’s also nothing to stop one of them from resigning later. I cannot control that.
Often if the SMSF has two members (a couple), they will have enduring powers of attorney for each other. That means it’s possible for just one of them to be the director of the trustee without breaking the SMSF rules or even (unusually) for just one person to be the sole individual trustee. That can be particularly useful if one member of the couple is slowly declining when it comes to mental capacity, but the other is still willing and able to run the SMSF.
When do people use this structure?
While dealing with diminishing capacity is one driver for this structure, there are others. For example, it’s common if the SMSF members are moving overseas. There are important rules about residency that depend on the physical location of the people who are making decisions about the fund. Sometimes they can only be satisfied if the people who move overseas actually stand down and their attorneys take over the running of the fund. Often the roles are reversed in this case – the (adult) children are the donors and it’s their parent(s) that fill the attorney role.
There are alternatives and protections
It’s not always essential to give up as much control as it sounds when older generations are inviting the next generation to assist with their finances.
When it comes to SMSFs, for example, I could do a number of things other than step aside and have one or both of my sons control everything.
Because my fund only has one member, it’s allowed to have a second director without any of this enduring power of attorney rigmarole. If I felt I wanted more support in decision-making, I could invite one of my sons to become a director (not both) and continue to be a director myself. That option wouldn’t be available to us if the fund had two members.
Alternatively, I could invite them both to be members as well – then we could all be members and directors of the corporate trustee together. If I eventually lose capacity, then I would just stop being a director but remain a member. They don’t even have to put all their super in the SMSF. They could leave their own super savings elsewhere (possibly even in their own SMSF – now that would make their mother proud!) and have just a nominal amount in the fund they share with me.
This option is available to couples too – in fact, the new rules allowing SMSFs to have up to six members means a couple and their four children could all belong to the same SMSF and run it together.
Another alternative for couples is shared control. This one is common when (adult) children are moving overseas for a time and enlist help from a parent to run the SMSF while they are away. They could have just one person resign as a director and their attorney (a parent) replace them. The other member of the couple would remain a director.
The attorney could even be someone completely different (a friend, a professional). The only requirement is that the attorney is over 18 and mentally capable of making financial decisions.
Of course, the donors should also choose them carefully! They need to make some very important decisions. And while your accountant or lawyer might appear a great first choice – that’s usually not possible. For a start, they can’t get paid (either directly or indirectly) for being a trustee (or director) of an SMSF. They also have to take on the role personally rather than via their business – so they are accepting huge personal responsibilities not covered by their normal business insurance.
For corporate trustees, this article is simply about the directors. The shareholders of the trustee company would normally continue to be the original members. That actually does give some control back to them. If things really go bad with my son(s), for example, as long as I continue to own the shares in the trustee company, I have the power (under the company’s constitution) to sack directors. Similarly, many SMSF trust deeds give the members the power to remove individual trustees or remove the company in its entirety. There are options but it can get time-consuming, stressful and risky.
And finally
So far I’ve looked at this issue on the assumption that I’m still mentally able to make decisions and the only issue here is whether I want to hand over the SMSF reigns to the next generation (or someone else entirely). If I lose mental capacity, I will have no choice. It is illegal for someone who is no longer capable of making their own decisions to be the trustee of a trust or director of a company. They must resign or be removed.
At that point, I would really hope the enduring power of attorney is in place so that someone else can be the trustee of the SMSF. Otherwise, the fund might need to be wound up or converted to a small APRA fund. Winding up might make perfect sense but not in every case. It’s good to have options.
That’s the main reason I think enduring powers of attorney should be a given for anyone with an SMSF.
Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.
To view Heffron's latest SMSF Trustee webinar, 'Super contributions unpacked', click here (requires name and email address to view). For more articles and papers from Heffron, please click here.