What About an Enduring Power of Attorney

7 Mar 2024

Written by

David Busoli, Principal

To meet the definition of an SMSF in s 17A of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA), all fund members must generally be trustees of the fund (or directors of a body corporate that is trustee) and vice versa.

Director/trustees who, due to an extended overseas residency which may cause the residency status of the SMSF to be brought into question, or a loss of capacity, could make this untenable. An enduring power of attorney, granted by the member to a trusted person is a common solution but what does this entail?

Once an EPoA is activated, it is not a matter of the attorney acting on behalf of the member, they act instead of the member. That means they have all the rights and responsibilities, including liability for penalties. They can make investment decisions and, subject to the deed and/or provisions of the EPoA, may even be able to alter binding death benefit nominations and decide on benefit payments. Clearly both the choice of the attorney and the decision by the attorney to accept the appointment are significant considerations.

An EPoA cannot be made once capacity has been lost. Also, as EPoAs are subject to state legislation, their continued validity must be checked if the grantor becomes a resident of another state. Remember that an EPoA ceases on death. It can also be revoked by the grantor at any time, though this is a complex issue if the grantor’s then mental capacity is in doubt.

It’s common for spouses to be the EPoAs for each other but is this appropriate? In blended family situations it may not be. It’s also common for an overseas residency issue to be dealt with by both individuals in a couple providing EPoAs to trusted Australian residents but that’s not always necessary. Generally, only half the trustees need to be Australian residents. (Note that voting powers and influence are also relevant and need to be considered.)

The activation of an EPoA requires some attention. The process differs, depending on whether the fund has corporate or individual trustees but is, naturally, simplified if the attorney is already a co-trustee/director, usually by virtue of existing fund membership.

For a corporate trustee the director must resign, and the new director appointed. This process is enabled by the enduring power of attorney, it is not authorised by it. The director replacement must be in accordance with the company’s constitution. (This article is a consideration of EPoAs, not Wills, but it’s important to note that an LPR has a similar issue and can’t be appointed simply because they are the LPR if the company’s constitution does not facilitate this. This could be a significant problem in a hostile beneficiary situation, as may occur in a blended family, unless appropriate arrangements have been made prior.) No change is required to the names in which the assets are owned or to the SMSF’s trust deed.

For an individual trustee, the resignation and appointment process is laid down in the deed but both the deed and the names in which all the investments are held must be changed. This can be a significant task and, as it’s required in any case, presents an opportunity to change to a corporate trustee. This is particularly relevant when you consider that any subsequent change will require the same process which, if a corporate trustee is appointed at this time, will make matters so much easier. Personally, I would not accept an EPoA appointment unless the trustee was a corporation due to the onerous administrative penalty regime applied to individual trustee SMSFs.

Often, the attorney is also the executor of the members Will. As it is easier to be appointed as a trustee/director prior to the member’s death a useful consideration would be to make the appointment under the EPoA beforehand. Though the EPoA is revoked on death the appointment would then be allowable as the LPR thus streamlining the process.

A couple of final points.

The attorney is compelled to act in the best interests of the grantor. This may not always by practical or useful in the broader sense. For the attorney to change BDBNs and/or withdraw member benefits, including just prior to the member’s death, the EPoA must contain appropriate conflict provisions. These can be tailored and need to be carefully considered particularly in blended family situations. Note that they will generally not be acted upon by APRA funds, so this flexibility is peculiar to SMSFs.

Appointing an EPoA is no solution for bankruptcy. The bankrupt member will still need to leave the fund unless the trustee is APRA regulated.

It is advisable for all director/trustees to have an EPoA as part of their standard documentation as it may be required unexpectedly. Its specific detail and continued effectiveness should be considered along with the member’s Will and BDBNs.

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