Tailoring an EPOA for a member
The use of an enduring power of attorney can provide additional levels of certainty to the wishes of an SMSF member, but careful attention must be given to their circumstances.
There has developed more of a need in recent times that people consider what would happen with respect to their affairs if they lost legal capacity. The population is ageing and the risk of incapacity is therefore heightened. This has highlighted the need for people to undertake appropriate succession planning and, as part of that planning process, to have enduring powers of attorneys (EPOAs) in place. This need is relevant not only with respect to the general financial affairs of the population at large but, it is also the case that EPOAs are of particular importance to those with SMSFs. EPOAs are often the staple of bespoke superannuation strategies. An EPOA is an essential document for members of a properly administered SMSF to have in place and, as such, it’s timely to consider what exactly an EPOA is, and the benefits and limitations an EPOA presents.
Before answering this question, however, it is pertinent to remind ourselves of a relevant and fundamental rule applying to self-managed superannuation funds (SMSFs). Section 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) requires each member of an SMSF to be a trustee of the SMSF or, in the case of corporate trustees, a director of the trustee. Importantly, the contravention of this rule may cause a fund to cease being an SMSF and, in turn, lead to serious taxation consequences.
An exception to the above rule is where a member (the donor) has properly executed an EPOA in favour of a legal personal representative (the donee). In these circumstances, the appointment of the donee as a trustee of the SMSF in place of the donor, for the reasons set out further below, will not cause the fund to cease being an SMSF.
Nature of an EPOA
An EPOA is a legal instrument that allows the person named in the EPOA to represent another for the specific purposes stated in the EPOA. In the context of an SMSF, an EPOA is a document that is executed by a donor so that the donee can make certain decisions on behalf of the member. These decisions may include the cashing of member superannuation benefits or the sale of certain assets the member owns. Each Australian state and territory has its own legislation governing powers of attorney, and a power of attorney must be properly made under the relevant legislation. However, it is generally the case that an EPOA properly prepared in one jurisdiction in accordance with the relevant law will be recognised in other jurisdictions.
Significantly, unlike a general power of attorney, an EPOA continues to operate in the event that the donor becomes legally incapacitated. In fact, in many superannuation strategies, an EPOA will only come into effect upon the legal incapacity of the member. This feature of an EPOA makes it an important tool in ensuring that a donor’s wishes are carried out in spite of the member’s incapacity.
At this point, it is also prudent to note that a general power of attorney is insufficient for the purposes of meeting the conditions in section 17A which apply on incapacity of a member. Moreover, from a practical perspective, the proper operation of the section 17A exception requires the donor of the EPOA to be removed as trustee or director of the trustee of the SMSF and the donee under the EPOA appointed in the donor’s place. This is pursuant to sub-paragraph 17A(3)(b) of the SIS Act.
Scope of powers
One of the hallmark benefits of an EPOA is the flexibility it provides to suit the individual circumstances of each donor. That is, an EPOA can be tailored to empower the donee to make a range of financial decisions on behalf of the member or, alternatively, an EPOA can restrict the powers of the donee to specific actions. Examples of these powers are set out in the strategies below.
The above mentioned flexibility is not limited to powers but also extends to practicalities. For instance, a donor is able to execute an EPOA in favour of multiple donees who can then only make decisions with joint agreement. A benefit of such action is that the donees are held accountable to each other, thereby providing a higher level of assurance that the donor’s wishes are honoured.
Notwithstanding this flexibility that allows for tailoring of the terms of an EPOA to the donor’s particular circumstances, it is imperative to understand that the scope of an EPOA must also be prepared against the background of, and is nonetheless restricted by, the law. For example, attorneys are not permitted to exercise powers to make directorship decisions with respect to any company of which the donor is a director. This is of particular importance where an SMSF has a corporate trustee, as it may be necessary for additional documentation to be prepared in addition to the EPOA so that the donees are able to remove the donor as a director of the trustee and appoint themselves in the donor’s place. In the absence of such action, the donees will be restricted to making member decisions and more significantly, the SMSF possibly becoming non-complying.
As always, it is also imperative to consider the relevant SMSF deed to ensure that the deed does not restrict the use of EPOAs. In the event that such restrictions exist, it may be necessary to first amend the deed before effecting the EPOA.
Obligations of an attorney
The relationship between a donor and donee of an EPOA is one of a fiduciary nature. This means that the donee cannot personally benefit from their position. This is, of course, subject to the careful wording of the EPOA which may nonetheless allow for the donee to benefit if the donor so desires. In all circumstances, the donee must act in the best interests of the donor and avoid scenarios whereby the donee’s interests conflict with the donor’s.
Although the ability to have an EPOA be appointed as a trustee or director of a corporate trustee of an SMSF provides flexibility and a safeguard against circumstances where the SMSF may become non-complying, significantly, in this situation, the donee is subject to civil and criminal implications for any contraventions of the superannuation law or corporations law where the donee acts as a director of a corporate trustee. Therefore, it is prudent for the donee of an EPOA to obtain independent legal advice in order to understand their duties and obligations in taking on the role as trustee of an SMSF.
Using an EPOA
The common example of the use of an EPOA in the SMSF context is to maintain the SMSF when a member wishes to temporarily reside overseas. By executing a valid EPOA and appointing a competent donee, the departure of the member should not inhibit the ongoing compliance of the SMSF.
In more recent times, as the importance of succession planning has become more pronounced with people living longer and accumulating more significant levels of wealth, strategies have emerged whereby members prepare EPOAs as a planning tool for their ultimate incapacity. These strategies typically involve members who wish to direct their superannuation death benefits to their adult children (i.e. non-death benefits dependants under the taxation laws), or those who do not have any children. As the receipt of such benefits in the hands of adult children should be subject to taxation, assuming the benefits involve a taxable component, the member may prepare an EPOA which nominates the member’s adult children as the member’s legal personal representatives. In the event of the member’s incapacity or imminent death, the EPOA grants the adult children with the power to effect a lump sum cashing arrangement. As a result, all of the member’s benefits are withdrawn as a member payment prior to death. On the basis that the member has met a condition of release with a nil cashing restriction at the time of the payment, all of the benefits can be received tax free.
This strategy may also have merit for members who are part of a blended family, whereby the member is concerned that certain persons will gain control of the SMSF upon the member’s death. While a binding death benefit is often seen as the necessary tool to bring certainty to the direction of a member’s death benefits, an EPOA could bring even further certainty during the life of the member by granting the donee a level of control over the SMSF.
The EPOA in the above example could be specifically drafted so that the powers granted to the donees do not extend beyond that necessary to effect the arrangement. In this respect, the member could have concurrent EPOAs that deal with the member’s affairs outside of superannuation.
Importantly, while the above strategy may present considerable benefits, in the absence of further documentation, the member’s benefits should ultimately form part of the member’s estate upon death. It is important to be alive to the fact that this may leave the benefits exposed to claims for provision from disgruntled family members.
Further, while the initial thought may be for the adult children to use the EPOA to gift the cashed benefits to themselves or to entities controlled by the children, advisers must first look at relevant state or territory powers of attorney legislation. This is because some legislation, such as the Powers of Attorney Act 2007 (Vic), prohibits donees from making gifts outside of explicit circumstances such as to relatives for special events e.g. birthday gifts. As the donor in the circumstances of the example would be incapacitated, this may result in the cashed benefits being locked in the hands of the donor and subject to the terms of the donor’s will and exposed to any provision claims.
Advisers should therefore consider whether additional arrangements could be contemporaneously entered into at the time of preparing the EPOA, so that the member’s benefits do not form part of their estate upon death.
It is clear that the proper use of an EPOA can provide additional levels of certainty to the wishes of an SMSF member. That said, the use and design of an EPOA should be carefully considered and tailored to meet the member’s specific needs. Often, an EPOA will be implored as part of a suite of documentation in the member’s broader succession planning affairs. As such, the use of an EPOA must give careful attention to all of the member’s circumstances.
Nicole Santinon, senior associate and Joshua Pascale, associate, superannuation group, Cowell Clarke