Replacing trustees and mental incapacity

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If you are currently a trustee or a director of a corporate trustee of an SMSF, you will recall signing a number of legal documents for your appointment and acceptance to be appointed as such.

A position of trustee often entails extensive duties and responsibilities, and the formality is required as one should not be given such a position easily or automatically.

All members of the fund must be individual trustees or directors of the corporate trustee but a person under a legal disability (such as mental incapacity) cannot be a trustee or director of corporate trustee of an SMSF.

This means, if a trustee or a director of an SMSF loses mental capacity whether by deteriorating health conditions or by tragic accident, appropriate actions need to be taken within 6 months in order for the fund to comply with the above requirement and maintain the fund’s complying status.

For example, James and Mary are members and individual trustees of an SMSF. James and Mary both lost mental capacity in a tragic accident. James and Mary previously signed a valid enduring power of attorney appointing their son John as their attorney. John now wishes to act as a trustee of the SMSF in place of his parents.

The superannuation law provides that an enduring attorney of a member who lost mental capacity may be a trustee of an SMSF (or director of the corporate trustee) in place of the member.
However, it is important to understand that this is not an automatic replacement and is not always as easily done as some people may believe.  Formal appointment of the enduring attorney as replacement trustees as well as the retirement of James and Mary as the current trustees are required in accordance with the trust deed and relevant laws. This requirement for formal appointment and retirement also applies to any director of a corporate trustee of an SMSF.

Accordingly, preparing for loss of legal capacity requires more than just an enduring power of attorney. The situation would be much more complicated and costly if the trust deed does not allow an alternative decision maker to formally appoint replacement trustees in the event of both trustees/members losing mental capacity.

If the trust deed only allows the current trustees or members (i.e. James and Mary) of the SMSF to appoint replacement trustees, then this appointment power can no longer be exercised as the current trustees/members have both lost their legal capacity. John would need to apply to the court which would be a significantly more time consuming and costly process.

To avoid this, members should obtain advice regarding the trustee structure and terms of the current trust deed to allow appropriate means of appointing replacement trustees to protect against the risk of members losing mental capacity.

By Jeff Song, Solicitor

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