Losing capacity: The issues for SMSF trustees and what you need to do

Mental illness and loss of capacity affect millions of Australians every year, yet these issues don’t receive the coverage and attention they deserve.

What we often overlook are the flow-on effects where an individual with diminished capacity acts in other roles, for instance, as a director of a company or as a trustee of a trust, including a self-managed super fund (SMSF). The effects on these entities can be significant, potentially jeopardising the retirement savings of the individual and the other members of an SMSF.

In this article we look at simple yet effective safeguards to reduce this risk.

Background

A fundamental requirement for all SMSFs is that every member of the fund must also act as a trustee for the fund or as a director of the corporate trustee. This ensures each member has a say in the way their retirement savings are managed and that every member is responsible for the ongoing compliance of the fund.

If this fundamental requirement is not satisfied, the fund will fail to meet the definition of an SMSF, which could eventually lead to the loss of tax concessions.

The appointment of all members as trustees or directors usually occurs when the SMSF is established. But keep in mind that this is an ongoing requirement; all members must remain as a trustee or director for the entire period that they are a member of the fund.

As you would expect, if an event occurs that precludes a member from acting as a trustee, it can create a major problem for all members of the SMSF, not just themselves.

One such event is the loss of capacity.

Why is the loss of capacity an issue for an SMSF?

The wording of most SMSF trust deeds will include rules that come into effect if a member loses the capacity to act in their role as a trustee or director.

Individual trustees