How does mental incapacitation affect my SMSF?

How does mental incapacitation affect my SMSF?

How does mental incapacitation affect my SMSF?

Article by Anna Agati – MB+M
We have previously presented you with seminars and articles on what will happen to your Self Managed Superannuation Fund (SMSF) when you pass away, we may have also discussed this with you personally.

However, do you know what will happen to your SMSF if you or your spouse/partner are still around and unable to make decisions?

To be a member of a SMSF, you also have to be a trustee of the Fund, either as an individual Trustee or as a Director of the Trustee Company.

The Trustee (or Director) is responsible for running the SMSF and making decisions which will affect the members’ retirement benefits. Therefore the trustees are required to:

o    act honestly in all matters concerning the Fund

o    act in the best interests of all Fund members when decisions are made

o    manage the Fund separately from their own affairs

o    know, understand and meet their responsibilities and obligations

o    ensure that the SMSF complies with the laws that apply to it.

To be a trustee of a SMSF you need to be over 18 years of age, not under any legal disability (for example, mental incapacity) nor a disqualified person(1).

So, if a member is mentally incapacitated, for example has dementia, which excludes them from being a trustee, can they still be a member of a SMSF?

With some planning in place, the answer is yes.

The SIS Act allows for a Legal Personal Representative (LPR) to take over the member’s responsibilities in certain situations.

“A LPR can act as Trustee for:

o    a deceased member, until the death benefit becomes payable,

o    a minor (a parent or guardian can also act as a trustee on behalf of a minor),

o    a member under a legal disability”(2)

An LPR for a deceased member or a member under a legal disability needs to be nominated before the event happens, eg. losing mental capacity. A nomination cannot be made after the fact.

So how is a LPR appointed?

In Victoria an LPR can be nominated by making an Enduring Power of Attorney. (EPoA).

“An EPoA is a legal document that lets you appoint someone (an attorney) to make certain decisions for you. The power endures – or continues – if and when you are unable to make decisions.”(3)

The EPoA covers financial (eg paying bills, making financial decisions) and personal (eg. decisions on where a person should live) matters.  You can appoint one or many attorneys to cover both financial and personal, or you can nominate attorneys to have specific responsibilities.

What happens if there is no LPR and the member becomes mentally incapacitated?

In this situation, the member has to leave the SMSF as they can no longer act as a trustee.  Their member balance may need to be rolled over into a complying superannuation fund or paid to the member.

This may mean that assets may need to be sold so that the member balance can be rolled over or paid out.

The other issue we have is that without an LPR, there may be no one that is able to make the decision on which assets to sell and where the funds will be rolled over to.  In that case, someone may need to apply for guardianship over the member, so that they can make financial decisions for the member.

In Victoria, a guardianship application, goes before VCAT (Victorian Civil & Administration Tribunal), and the tribunal make the decision as to who will be appointed guardian. This process is more time consuming and expensive than preparing an EPoA and may result in the guardian being a person that the member may not have wanted to make decisions on their behalf.

What if the Trustee/member has made an EPoA?

In the case, where an EPoA has been prepared, then the attorney (who, for example, can be a relative) that has been nominated can become the LPR of the member.

The SMSF will continue to be a complying Fund and can continue to operate, without the need to roll out the member or having to wind up the SMSF.

This is only a brief overview of what will happen in the case where a member is unable to make their own decisions, this could be due to short or long term mental incapacity. Executing an EPoA is a part of a comprehensive Estate plan.

The process of appointing an LPR is also dependant of the rules of your SMSF (Trust Deed) and Company constitution.

Please give us a call to discuss how you can protect your SMSF.


(1)       Disqualified person –

o    has been convicted of an offence involving dishonesty,
o    has been subject to a civil penalty order under the super laws,
o    is insolvent under administration (including being an undischarged bankrupt),
o    have been disqualified by a court or regulator.