In our view, anyone who has an SMSF should also have an enduring power of attorney. Let me explain why.
Powers of attorney are vital for all of us with an SMSF – no matter how young, fit and healthy we may feel.
A quick re-cap
The term “power of attorney” is probably well understood. It involves one person (the donor) giving some important legal powers to someone else (the attorney). The attorney can stand in and do whatever the donor could normally do for themselves when it comes to a wide range of financial matters.
For example, I (the donor) could grant power of attorney in favour of my son (the attorney) and he could sign contracts on my behalf to sell my house. The key here is that he is standing in for me and doing something in my place. He has to be careful that he’s acting in my interests and not his own. Other than that, he can do pretty much anything I could do for myself when it comes to financial matters. (If I wanted him to also make decisions about my health, I’d need different documents.)
Normally, a power of attorney ends if the donor can’t make decisions for themselves (for example, they have dementia). But a special power of attorney – an “enduring” power of attorney – continues even if the donor becomes incapacitated.
There are some things my attorney can’t do for me no matter what type is in place. For example:
- I’m a qualified actuary and can sign certain certificates that need an actuary. The fact that my son holds an enduring power of attorney for me doesn’t allow him to do that,
- I’m a director of the company that runs my business. He can’t fulfill my duties as a director just because he holds that power of attorney – a power of attorney for me only covers my personal affairs. (The company itself could grant a power of attorney but that’s something else entirely.)
- If I was the trustee of a trust (individually rather than via a company), he can’t attend to trustee duties for me either.
How are enduring powers of attorney helpful for people with SMSFs?
So at this point, powers of attorney are not sounding particularly helpful for SMSFs!
However, running alongside these rules about powers of attorney we have entirely separate legislation about SMSFs.
That legislation says – more or less – that if you are a member of an SMSF you have to also be a trustee (or director of the company that is the trustee). The idea of course is that if you are going to step into the world of running your own super fund, you really have to run it.
But there are a couple of exceptions. One of these is that if you have someone who holds an enduring power of attorney, they can be a director or trustee instead of you.
This sounds just like my son stepping in for me and selling my house. But it’s completely different.
If my son was allowed to use his power of attorney for my SMSF just like he can use it to sell my house, I would remain a director and from time to time he would sign documents “as me”. But that’s not allowed – fulfilling my duties as a company director is one of the things my attorney can’t do for me.
The rules for SMSFs instead allow me to step aside entirely (for example I would resign or be removed as a director) and have him take my place (he would be appointed as a director). Normally this would be a problem – I’m a member but not a director. But there is a special carve out that says that’s fine, as long as I’ve been replaced by someone holding an enduring power of attorney for me.
My son would be a director of my SMSF trustee and have the full responsibilities and powers as a director just as if it was his own SMSF.
Legally, this different approach is profound. For a start, he’s not required to act exactly in line with the power of attorney any more. For example I actually have two sons. My enduring power of attorney requires them to make decisions together. So to sell my house, they would have to both agree. But if only one of them became the director of my SMSF trustee, then he (and he alone) would be making decisions about my SMSF. He couldn’t defer to his brother or share decision making with his brother.
He would also – like any other trustee – have to act in the best interests of all members, not just me. The fact that he’s only there because of me is irrelevant. He’s not my “representative”, he is a director of a company charged with running an SMSF for all its members.
And it’s different in a practical sense too. On documents, for example, my son’s name would appear as the director and he would sign in his own right. He’s not signing “as attorney for mum”. In contrast, if he was signing something on my behalf as a member (for example, a request to start a pension or withdraw my super) he would be signing as attorney for me as an individual.
Some important points to make this work
Often an enduring power of attorney only comes into effect if the donor becomes incapable of making their own decisions. Normally, that makes sense – you might not want anyone to have the power to control your life until you can’t do it yourself. But that will mean your attorney can’t be the trustee of your SMSF while you are still mentally able. So anyone intending to use this as a mechanism to allow (say) an adult child to be the trustee of their SMSF would need to make sure the power had been activated.
It's also possible to impose limits that only allow that person to be the trustee of your SMSF – so they can’t control decision making in other areas.
In my SMSF, it’s fine for just one son to be the director of the trustee or both. The SMSF rules will be satisfied either way. I might prefer both (so that indirectly they are still making decisions jointly) but there’s also nothing to stop one of them resigning later. I can’t control that.
Often if the SMSF has two members (a couple) they will have enduring powers of attorney for each other. That means it’s possible for just one of them to be the director of the trustee without breaking the SMSF rules or even (unusually) for just one person to be the sole individual trustee. That can be particularly useful if one member of the couple is slowly declining when it comes to mental capacity but the other is still willing and able to run the SMSF.
When do people use this structure?
The reason I see an enduring power of attorney as so important for anyone who has an SMSF is that we never know what the future holds.
At any time, something could happen to any one of us that makes us unable to look after our SMSF. (Because don’t forget – someone who has lost mental capacity actually has to be removed as an SMSF trustee or director of the corporate trustee. They can’t continue with someone helping them out informally or the other trustee just picking up the slack). An enduring power of attorney is vital to make it possible in a seamless way. Even better it can allow the family (with the support of a member who is experiencing a steady decline) to take over early.
But it’s an important decision with big consequences – definitely one issue on which we should all get legal advice and properly prepared documents.