What should you do if your client develops dementia?

A father is a trustee of an SMSF held with his wife. He is 78 and has been diagnosed with the early stages of dementia. Whilst he is currently capable of making decisions and managing the fund, the family are extremely worried about his future capacity. What measures can the children put in place to protect both parents and plan for a time when the father will not be able to manage the fund?

The looming risks of dementia

Dementia is not a specific disease but rather a term that describes symptoms associated with more than 100 different diseases characterised by the impairment of brain function. The most common type of dementia is Alzheimer’s disease. According to the Australian Institute of Health and Welfare, an estimated 298,000 Australians had dementia in 2011. With an ageing population and the absence of an effective prevention or cure, the number is expected to triple to 900,000 by the year 2050.

The ATO reported that as of 30 June 2013, approximately 42 per cent of all SMSF fund members were over age 60. That is approximately 420,000 60-plus-year-olds who have trustee responsibilities. Combine the growth of SMSFs with an ageing population with an increasing incidence of dementia and we face a looming problem for SMSF trustees.

Legally, the loss of mental capacity for a trustee of an SMSF means that they can no longer make decisions as a trustee of the fund. The critical period for an SMSF is the time prior to diagnosis when the trustee may be making or not making decisions that would be in the best interest of the members of the fund. Thankfully, in this case, the father has been diagnosed and appropriate steps can be taken now to protect both parents' interests.

There are 4 options the trustees of this SMSF have:

First, they could retain the SMSF and appoint additional trustees to the fund who share trustee responsibility as they age. Typically this would occur with adult children joining the fund. An SMSF can have up to four trustees and they must be admitted as members of the fund. The positive is that the fund can continue. The negative is that the father is still responsible for the fund as a trustee. Appointing an additional trustee is adding complexity as the trustee will need to accommodate the varied needs of the other trustees as members of the fund.

Second, the father could appoint an individual to take on trustee responsibility on his behalf under an enduring power of attorney or guardianship.

Third, the parents could close the SMSF and rollover the fund to a public offer fund. All ongoing administration and compliance of the fund reverts to a third-party trustee. Ongoing management costs of a public offer fund will vary depending on what features you are looking for in a fund so they should shop around. The gap in costs between a public offer fund and an SMSF narrows as the value of the super diminishes or the trustees outsource more of the administration and management of the SMSF to third-party professionals as their interest or capability to manage their fund diminishes. Please note before considering the wind-up of an SMSF that tax advice should be sought in relation to any potential capital gains tax.

Most public offer funds will have a range of investment options available from which to choose. If the parents' SMSF invests in direct shares, term deposits and managed funds, typically these can be accessed via a range of public offer funds.

The fourth option is for the parents to convert the fund into a small APRA fund (SAF). A SAF offers all the flexibility of an SMSF but without the trustee responsibilities. A SAF has an appointed independent trustee who manages the trustee responsibilities on an individual fund basis and on an agreed fee basis. The key negative is the father and his wife will have additional costs that they don’t face now.

Most people establish an SMSF wanting to take control of investment selection and in the belief it will be cheaper to run. As the capacity or interest in running your own fund diminishes it makes sense to weigh up the cost and benefit of self-management. In this case, future planning considerations will be based upon the father’s health and the future deterioration of his cognitive capacity. Ultimately, the decision will be based upon what types of investments the parents want to own in their super fund, the ongoing costs to manage and how much future involvement they want or are capable of undertaking in the decision-making process.

Andrew Heaven, director, Wealth Partners Financial Solutions