Advisers play a key role in advising trustees and members on the initial structure of a fund, as well as the ongoing operation, management and compliance of the fund generally. For this reason, it’s important that advisers raise the possibility of incapacity at the earliest opportunity and assist members in implementing strategies to address what will happen on the incapacity of each member.

What you need to know

The likely outcome on the incapacity of each member should be raised pre-emptively, and the associated risks understood and addressed in a way that takes into account each member’s circumstances and succession planning requirements. In particular, it is important to consider:

  • the trustee, member and shareholder structure of the fund and the corporate trustee, including who will effectively control the fund on the incapacity of each member;
  • the appointment of an attorney pursuant to an enduring power of attorney for each member that allows the nominated attorney to step into the member’s role on incapacity, and how this will occur in practice in light of the fund deed and the constitution of the corporate trustee; and
  • how the voting rights attaching to the shares in the corporate trustee will be exercised following the incapacity of one or more members.

Below we consider some of the key issues that are often overlooked in planning for incapacity in a self-managed superannuation fund context.

Voting mechanisms  

It’s important to consider the fund’s structure and model various control scenarios before each member loses capacity, including who will exercise the rights attaching to any shares in the corporate trustee (if relevant).

While subject to the terms of the particular trust deed, it’s common for fund members to have power to appoint and remove the fund trustee. This means that the members effectively have power to control the fund via the appointment or removal of the fund trustee.

It’s also common for the fund deed to provide that if the members do not agree unanimously, or to overcome a ‘deadlock’ voting situation, the constitution and fund’s trust deed may provide that the relevant voting power is weighted according to each respective member’s balance in the fund.

This is problematic given that trustees are required to act together in exercising their decision making power and it could further entrench the idea of the ‘controlling trustee’, whereby a trustee exercises the high level and strategic decision making powers in respect of the fund, while the remaining director is essentially passive and notionally involved in the control and management of the fund.

This concept is further exacerbated by the fact that each trustee could be penalised for a contravention of superannuation law.

It is also questionable whether this arrangement is consistent with superannuation law, as the member with the lower balance will automatically be overruled on each point where a deadlock arises. This effectively defeats the purpose of having each member appointed as a trustee. This issue could give rise to future litigation if the current laws that operate in relation to minority shareholder oppression are extended to apply in this situation.

For these reasons, fund deeds providing for alternative dispute resolution strategies may provide a more reasonable, balanced and appropriate outcome generally, but especially where a fund member has lost capacity.

Succession strategies

Typically under a company constitution, a director automatically loses their office as a director when they lose mental capacity.

Importantly, on loss of mental capacity, a director’s attorney appointed under an enduring power of attorney does not automatically become a director. This means that the attorney cannot act in place of the director, or exercise the voting rights of the director.

An option, however, is to tailor the fund deed and the constitution of the corporate trustee to require the attorney (subject to their consent) to be appointed as a director of the corporate trustee, generally without the consent of the remaining trustees and members. This ensures that the intended party effectively exercises the control of the incapacitated director.

A key issue is ensuring that the ability to amend, vary or modify the provisions in the fund deed and the constitution that give rise to the succession powers is restricted once a member has lost capacity. The downside to this approach, however, is the limited flexibility to adapt to changing circumstances in the future, including legislative change.

In addition to complying with superannuation law, the parties must also ensure the succession to the director role complies with the Corporations Act 2001 (Cth).

Corporate trustee structure

The shareholding of the corporate trustee of a fund is fundamental to assessing the current and future control of the fund. The exercise of each member’s voting rights and what will happen on the incapacity of one or more members should be considered and discussed at the outset and a plan put in place to ensure each member’s interests are sufficiently protected as part of each member’s general succession and estate planning strategy.

It is important to consider who will exercise the voting rights attached to the shares held by the incapacitated member in the corporate trustee, as the shareholders ordinarily have power to appoint and remove the directors of the corporate trustee.

In particular, the constitution of the corporate trustee should provide that an attorney appointed under an ensuring power of attorney has the right to exercise the voting power of the respective shareholder. As an attorney does not have the right to exercise the shareholder rights of the relevant member as a matter of general law, if the constitution is silent on this point, the voting rights of the shareholder will effectively be forfeited.

Fiduciary obligations of attorneys

We are often asked whether an attorney can withdraw the superannuation benefits of a member before death where the death benefit is payable to adult children.

Generally, the purpose of the withdrawal of the superannuation benefits is not to benefit the incapacitated member, but to minimise any tax payable on the incapacitated member’s death. This is likely to be the case where the superannuation payment is made shortly before the member dies and this was reasonably foreseeable by the attorney, or the amount withdrawn is superfluous to the member’s financial requirements.

As a fiduciary relationship exists between the attorney and the member, the attorney is held to a higher standard of conduct than would otherwise be the case. The attorney has fiduciary duties that broadly involve ensuring that:

  • their personal interests and the fiduciary duty owed to the member do not conflict;
  • the fiduciary duty owed to the member does not conflict with another fiduciary duty; and
  • they do not profit from acting as attorney for the member without the member’s knowledge and express and informed consent.

For these reasons, utilising an enduring power of attorney to withdraw member benefits before death should be approached with caution.

Conclusion

The importance of planning for each member’s incapacity cannot be overstated and ideally, should be addressed at the outset when setting up the fund. The structure of the fund and the provisions of the fund deed and the constitution play a key role in determining the ultimate control of the fund, and the effective decision-maker.

Planning for incapacity goes beyond appointing an attorney under an enduring power of attorney, and may require tailored documents and a considered approach to ensure the strategies are consistent with each member’s broader estate planning and succession requirements.