SMSF / SMSF Strategy

Ageing SMSF members

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We are constantly bombarded by the government about how we need to deal with an ageing population.  Intergenerational reports, proposed tax incentives to work longer, changes to qualification ages for Age Pension entitlement all seek to address this ageing issue.

But what about ageing issues regarding SMSF trustees?

Section 21.3 of the Super System Review (Cooper Review) Phase Three Issues paper wants us to consider the impact of ageing trustees, in particular with mental incapacity to undertake their duties. Furthermore, it asks whether there should there be an age where trustees need to be encouraged to move arrangements out of their hands or at least into simpler products needing less active management.

The statistical report of SMSFs issued prior to the Phase Three issues paper outlines that 15.5% of all SMSF members are now over 65 years of age (more than 123,000 people[1]). This number would be expected to grow significantly over time due to the overall ageing population and continued growth of SMSFs.

I would be the first to admit that SMSFs can certainly have a ‘use-by’ date for many trustees, in particular as people get older and wish to simplify their circumstances.  I see clients who simply don’t want to have to deal with the fund’s compliance obligations anymore and they feel these requirements are too onerous for them.  The sale of a business, including business real property is a common example of where the fund may have reached its use by date.

However, I do not believe there should be any imposed restrictions around trustees as a result of age.  Why?

Firstly, in life we all age differently.  The mental faculties of individuals at age 80 for example can be quite vast.  Some people at age 80 still drive a motor vehicle, whilst others are in a nursing home requiring full care.  When we consider SMSFs are established in the majority of cases because of the “control issue” it can become very hard for people to relinquish this whether it may be in their best interests or not.

In addition, the composition of the fund’s assets would also impact the ability for an ageing SMSF trustee to consider moving to a simpler financial arrangement.  Take for example where an SMSF includes business real property that is being used within a family business.  The business has been handed down a generation, but the property still exists within the ageing parent’s SMSF.  Whilst Mum & Dad may be ‘losing their marbles’ when it comes to meeting their trustee obligations, there is no reason to transfer this asset and lose the tax benefits available to them (within super).

It would be anticipated that this asset would pass out to beneficiaries as a lump sum at some stage in the future.  An SMSF is the only superannuation structure that can facilitate the ability to invest in direct property and also provide instructions to make an in-specie lump sum payment to beneficiaries (or an estate), subject to the requirements of the funds trust deed.  Just because age might dictate to simplify things, it doesn’t necessarily influence what a person believes to be their preferred asset class to invest in.  This is the beauty of choice available in using an SMSF.

So, how do you then deal with ageing members?

The current definition of an SMSF contained within section 17A of the SIS Act, allows for an enduring power of attorney (EPoA) to be appointed to act in the capacity of trustee for a person that has become mentally incapacitated. An EPoA could be one person or could also be more.  Whether two or more exist, a consider needs to be made regarding whether decisions are made jointly or whether they are made jointly and severally.  The appointment of more than one decision maker is common practice with siblings usually acting together for the best interests of one or more parents.

This unfortunately doesn’t carry through to the current definition under section 17A where a member dies.  Unless appointing a corporate trustee to act as a sole director, the surviving spouse can only appoint one other person to act as an individual trustee.  This is typically a difficult decision to choose between children to take on this responsibility and can be the cause of great animosity.   Therefore, it would be worthwhile considering whether the section 17A definition could expand to allow more than one family member to act in a capacity as trustee for a single member fund (i.e. two kids as trustees with one parent as trustee/member).

Limitations can be imposed on the EPoA to deal specifically with issues relating to the fund as trustee.  These may include, the ability to start or rollback a pension, contribute to super, make a lump sum payment, buy or sell fund investments, etc.  Whilst this does not provide flexibility to deal with matters, this is the choice of the incapacitated trustee at the time of making the conditions for an EPoA.

The Issues paper raised issues about custodian arrangements and the use of an external trustee for SMSFs.  Whilst many fund trustees may have family members who can act in a legal capacity on behalf of incapacitated individual, issues would obviously be presented for those who don’t have family (or don’t trust them).  Therefore, does a custodian arrangement need to be made available for SMSF trustees where they need to retain the fund assets but need the assistance moving forward?  People may argue that a Small APRA Funds (SAFs) addresses this issue?

I believe the current arrangements regarding the use of an Enduring Power of Attorney (EPoA) sufficiently address the issues of ageing SMSF trustees.  The use of attorneys is common practice to provide both financial and medical powers on behalf of an individual.  I believe the use of EPoAs are underutilised and not understood how they can be applied.  Not only can EPoAs cover ageing trustees but also for trustees heading overseas.  Sounds like another example of further trustee education!!


[1] ATO September 2009 quarter SMSF statistics, 795,099 SMSF members

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