Lack of capacity overlooked in SMSFs
Not preparing for loss of capacity within a self managed super fund (SMSF) can severely cripple that fund's day-to-day operation and is an issue not on enough trustee radars, according to Bryce Figot, Senior Associate at DBA Lawyers.
Outlining the most common scenario, Figot said that it began with the lack of an appointed enduring power of attorney.
"And that is all too common," he said. "The next part of this scenario, and this is the case in about two thirds of SMSFs, is that you've got Mum and Dad members and Mum and Dad as individual trustees.
"So if Dad's a bit older and he loses capacity, what a lot of people don't realise is that, under general law, you actually need all trustees to come together to make a decision."
Figot said that even in the event of a loss of capacity, a trustee's obligations were not relinquished and added that there was no law that could change that fact.
"So for the remaining trustee, Mum in this instance, if she wants to make a decision, Dad also has to make that decision and that may not necessarily be possible."
However, according to Figot, that is just the short version of the story. The longer version is that there may be a way out of it.
"So, for example, each state has its own special Trustee Act and most deeds actually have provisions regarding how you can go about hiring and firing the trustee," he said. "And hopefully your specific state or territory's Trustee Act or the actual trust deed will provide a solution but, at that stage, you're just hoping for the right outcome rather than having a planned outcome.
"Of course, that's just the vanilla scenario," added Figot. "It can get much hairier if Mum and Dad are on their second marriage with kids from a previous relationship, particularly if the wrong person gets control of the fund.
"They might attempt to rip all the money out of the fund, knowing that any challenges are going to have to go through the Supreme Court, could take up to 10 years and be extraordinarily messy in the meantime."
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