Q. My father is a trustee of my parents Self -Managed Superannuation fund (SMSF).  Dad is 78 and has been diagnosed with the early stages of dementia. Whilst he is currently capable of making decisions and managing the fund, we are extremely worried about his future capacity.  Mum is a Co-Trustee but has little understanding or involvement in managing the fund.  What measures can we put in place to protect them both and plan for a time when dad will not be able to manage the fund?

 

A. Dementia is not a specific disease but rather a term that describes symptoms associated with more than 100 different diseases characterised by the impairment of brain function. The most common type of Dementia is Alzheimer’s disease.According to the Australian Institute of Health and Welfare, an estimated 298,000 Australians  had dementia in 2011.  With an ageing population and the absence of an effective prevention or cure, the number is expected to triple to 900,000 by the year 2050.

The ATO reports that at 30 June 2013, approximately 42% of all SMSF fund members were over age 60. That is approximately 420,000 60 + year olds who have Trustee responsibilities.  Combine the growth of SMSF, with an ageing population with an increasing incidence of dementia and we face a looming problem for SMSF Trustees.

Legally, the loss of mental capacity for a Trustee of a SMSF means that they can no longer make decisions as a Trustee of the fund.  The critical period for a SMSF is the time prior to diagnosis when the trustee may be making or not making decisions that would be in the best interest of the members the fund.  Thank fully in your case, your father has been diagnosed and appropriate steps can be taken now  to protect your parents interests.

 

There are 4 options your parents have: 

They can retain the SMSF, and appoint additional Trustees to the fund who share Trustee responsibility as your parents age.  Typically this would occur with adult children joining the fund.  An SMSF can have up to 4 Trustees and they must be admitted as members of the fund.  The positive is that the fund can continue, the negative is your father is  still responsible for the fund as a Trustee.  Appointing an additional Trustee is adding complexity as you will need to accommodate the varied needs of the other Trustees as members of the fund.

Your father can appoint an individual to take on Trustee Responsibility on his behalf under an Enduring Power of Attorney or Guardianship. .

Your parents could close the SMSF and rollover the fund to a Public Offer Fund. All ongoing administration and compliance of the fund reverts to a 3rd Party Trustee.  Ongoing management costs of a Public Offer fund will vary depending on what features you are looking for in a fund so they should shop around.  The gap in costs between a Public Offer fund and an SMSF narrows as the value of the Super diminishes or the Trustees outsource more of the administration and management of the SMSF to third party professionals as their interest or capability to manage their fund diminishes.  Please note before considering the wind up of an SMSF tax advice should be sought in relation to any potential capital gains tax (CGT)

Most Public Offer funds will have a range of investment options available for you to choose. If your parent’s SMSF invests in Direct Shares, Term Deposits and Managed Funds, typically  these can be accessed via a range of Public Offer funds.

The fourth option is your parents can convert the fund into a Small APRA Fund (SAF).  A SAF offers all the flexibility of a SMSF but without the Trustee Responsibilities.  A SAF has an appointed independent Trustee who manages the Trustee responsibilities on an individual fund basis and on an agreed fee basis. The key negative is your parents will  have additional costs that they don’t face now.

Most people establish a SMSF wanting to take control of investment selection and in the belief it will be cheaper to run.  As the capacity or interest in running your own fund diminishes it makes sense to weigh up the cost and benefit of self-management.  In your parents case, future planning considerations will be based upon your dad’s health and his future deterioration in Cognitive capacity.   Ultimately the  decision will be based upon what types of investments your parents  want to own in their Super fund, the ongoing costs to manage and how much future involvement they want or are capable of undertaking  in the decision making process.

Follow Andrew on Twitter @AndrewHeavenFP. This article was originally published in The Australian