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Planning for incapacity

By Meg Heffron
July 26 2019
6 minute read
Planning for incapacity
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SMSF clients should ensure they have valid enduring powers of attorney in place and that the attorney nominated can fulfill their duties. Failure to do so will likely result in expense and complexity in the future.

When a trustee of an SMSF becomes legally disabled, he or she is no longer considered fit and capable of acting as an individual SMSF trustee or as a director of a corporate trustee.

This creates challenges for SMSFs, of course, because generally all SMSF members are required to be trustees or directors of the corporate trustee. Since an incapacitated person cannot fill that role, can they continue to be a member of the SMSF? 


Fortunately, yes, in that anyone, including someone who is incapacitated, can have their legal personal representative (LPR) step in as either an individual trustee or director of the corporate trustee in their place. The member’s LPR under superannuation law includes an attorney appointed under an enduring power of attorney (EPOA). To ensure compliance with the law, the LPR must step in within six months of the incapacitated member being removed as trustee or director.

How does it actually happen when a person becomes incapacitated?

The remaining trustees or directors will need to look to the fund’s governing rules such as the trust deed (for individual trustees), or the company constitution (for corporate trustees), for guidance on how to remove an incapacitated trustee. Some deeds and constitutions automatically remove a trustee on loss of mental capacity, and then action is required to appoint the incapacitated member’s LPR as trustee in their place.

It is common for SMSFs to have just two trustees/directors and two members. If one of the members appoints the other (i.e. an existing trustee/director) as their attorney under an EPOA, there is no need to appoint the existing trustee/director in that role again. That person will simply act as a trustee/director in relation to their own member interest as well as in relation to their LPR role.

What about members without an EPOA?

If the member did not put an EPOA in place prior to incapacity, things become a little more complicated. There are three options here:

  1. An administrator or guardian can be appointed for the member by a state or territory tribunal, or
  2. The fund can become a small APRA fund (SAF), or
  3. The member’s balance can be paid out, if eligible, or rolled out of the fund, often requiring the fund to liquidate assets

For most SMSFs, none of these options are particularly appealing. In our view, all SMSF members should have an EPOA regardless of their age — incapacity can happen at any time. Of course, this needs to be done before capacity is lost.

Who can be appointed as attorney/LPR?

To be appointed, the attorney must be over 18 and, of course, have capacity themselves. It’s advisable to ensure that this person has ability in terms of skills, time and willingness to manage the financial affairs of the person granting the power — the donor — including being a trustee of the donor’s SMSF.

Many people appoint their spouse, or an adult child or children, but it’s also possible to appoint a close friend, a professional (e.g. solicitor, accountant), a professional trustee company or a state government trustee. But remember that not all of these organisations/people will agree to be the SMSF trustee, particularly since they can’t be paid to do so and will take on all the responsibilities and risks associated with being a trustee of an SMSF.

More than one attorney can be appointed to act jointly, where all attorneys agree on all decisions, or severally, where they can act separately, each with the full power under the EPOA. An individual can also structure their EPOA to include a substitute or successive attorney to cover situations where the first attorney is no longer willing or able to act.

A very common scenario is that where mum and dad appoint each other as their attorney, with their adult child or children nominated as substitutes to step in if either mum or dad dies or loses capacity before the other.

Multiple attorneys

Where an EPOA appoints multiple attorneys, jointly or severally, in the ATO’s view one or more of those attorneys can be appointed as an individual trustee/director in place of the member. In other words, one-for-one substitution is not required.

The EPOA may require joint attorneys to act together when making decisions in relation to the donor, but if an attorney is acting as a trustee/director of a super fund, then their decisions in that role must be theirs alone and made in the context of that role.

A trustee of a super fund is required to act in the best interests of all members, not just the single member they may feel they represent.

There are pros and cons of appointing all attorneys as trustee/director or only one/some.  Appointing only one additional trustee or director can certainly be administratively simpler. However, it may put that person in a position of power compared to the remaining attorneys. Conversely, appointing all attorneys as trustee/director could mean the remaining trustees lose control of the fund, depending on the governing rules, constitution of the trustee company and voting powers. The appropriate choice in each situation will depend on the circumstances of the client.

The job of the attorney

Generally, the attorney (the LPR) can do anything that the donor could legally do as an individual. 

However, their power does not generally extend to doing things in their capacity as a director/trustee because the law doesn’t allow a director/trustee to delegate their authority to act in that capacity to someone else.

This is why an incapacitated trustee/director is removed from that role and their attorney is appointed in their place (as opposed to the trustee remaining and their attorney acting on their behalf).

Attorneys will be subject to all usual trustee duties and obligations, with all the penalties and consequences of breaches applying.

In terms of the member’s balance in the super fund, providing the rules of the trust deed allow (or at least do not prohibit) the LPR to exercise the donor’s rights as a member, the attorney can start or stop a pension or withdraw benefits as a lump sum. Depending on the terms of the fund’s trust deed and the wording of the EPOA document, they may even be able to make, renew or change a binding death benefit nomination.

Case study: The KevJan super fund

Kevin, 60, and Janita, 59, are directors of the corporate trustee and the only members of their SMSF. They have EPOAs in place appointing each other as attorney, with their oldest child, Adam, as substitute. 

Kevin loses capacity. In this case, the constitution of the corporate trustee states that the “office of director is automatically vacated if the director becomes of unsound mind…”.  As an existing director and now LPR, Janita runs the fund and performs the trustee duties with her now as the only director with all the voting rights.

Now and then, Janita withdraws lump sums from the fund from Kevin’s account. Here she is acting on behalf of Kevin as a member of the fund. Of course, Janita will need to make sure the terms of Kevin’s EPOA allow her to undertake transactions from which she will also benefit.

As a trustee, Janita then determines which if any assets need to be sold to fund the withdrawal and completes all necessary paperwork. 

Note the subtle difference here: in making the member request to withdraw a lump sum, Janita is acting on Kevin’s behalf as his attorney. In fulfilling the trustee duties, she is acting in her own capacity as she is now the only director of the corporate trustee.


In summary, it’s vital that all SMSF members and trustees plan and have valid enduring powers of attorney in place, and that the attorney nominated has the ability, as well as the inclination, to fulfill their duties. Failure to do so can result in the SMSF becoming non-compliant and add a lot of unnecessary expense and complexity at what is likely a very difficult time for everyone involved.