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Meg on SMSFs: Tips for the last member standing

I’ve written before about what needs to happen when an SMSF member dies, and the remaining member (often the spouse) takes over. But a reader recently asked – what happens next? That is, when the sole member and trustee becomes unwell, elderly or simply less able to look after their SMSF?

An entirely reasonable starting point if this happens to you is to consider whether the fund (in fact superannuation as a whole) is still the right spot for your money. I wrote previously about some of the things that might prompt any of us to wind up our SMSF. Some of those might just trigger winding up the SMSF but leaving the money in super (i.e., transferring it to a public super fund such as an industry fund). But for some people, winding up the SMSF will also be the moment they take all their money out of the super system entirely.

Tax is often a key driver here.

Beneficiaries who aren’t considered ‘dependants’ for tax purposes (for example, financially independent adult children) pay tax on some, if not all, the super they inherit from a parent. The tax rate sounds deceptively low - if the parent is over 65, it’s a maximum of 15% plus Medicare. But remember it’s a tax on the super balance not its income. If the balance is large it could be a very substantial sum (for example, 15% of $1 million is $150,000). Some people have part of their super that is classified as a ‘tax free component’ which avoids this tax. But for many of us, the vast majority of our super is a ‘taxable component’ (check your last super fund member statement to see yours).

But let’s imagine for the time being that you’ve decided to keep your money in super and in fact want to continue running your SMSF.

What should you do about the management of your SMSF?

First, I’m going to assume someone in this position has already moved across to a corporate trustee and they are the sole director.

It’s worth remembering that any SMSF with one member is allowed to have a second director (who is not a member) just because they want someone to help out. If there’s an appropriate person, that might be a good first step. If I only had one child and was a lot older, I would certainly consider it.

One challenge is that it can only be one extra person – any more and they will also need to be members. So my challenge would be I have two children. Do I really want to give just one of them a lot of involvement (and therefore power) over one of my largest assets (my SMSF) and effectively leave the other out of it?

Probably not – if I was going to bring one child in to help me, I would include both and they would then need to become members of my SMSF. At this stage, that doesn’t appeal to me.

A second challenge is that to actually make a decision, most constitutions require a majority of directors to agree (so in this case, both directors). In other words, having a second person involved just provides support to someone who is still willing and able to be a trustee themselves. It doesn’t provide a solution if they’re genuinely not up to it for a time.

So this doesn’t necessarily solve our reader’s problem. Her concern was running the fund in the event of a short / medium term illness rather than permanent decline – say a short stay in hospital followed by an extended recovery. During that time, she might be too unwell to focus on the fund’s investments, dealing with her adviser, lodging returns, making pension payments etc. But she may fully expect to return to the director’s chair in due course.

Another idea

There’s a particular twist that might suit in this case – having alternate directors of the trustee company.

An enduring power of attorney (which I’ve written about before) is essential here. It’s required any time someone else (let’s assume it’s the adult children) can take over when necessary - either because they have formally replaced the member as a director or in this case where they are being appointed alternates.

Both my sons have an enduring power of attorney for me so either or both could become directors of my SMSF trustee company if I become unable to look after it myself (and resigned my own directorship). And they could also be alternate directors for me on the board of the trustee company.

An alternate steps in as a director (with all the responsibilities and authority that carries) any time the actual director doesn’t feel able to do it or isn’t available. (In fact some ‘normal’ companies have alternates for directors who are not able to attend all the board meetings etc.)

Note that when an alternate steps in, they are temporarily replacing their director – they can’t make decisions together with them. If our reader wants to bring this person in permanently as part of the team running her fund, she’ll need them to become a director in their own right.

She could have two alternates (as long as both held an enduring power of attorney for her). But only one can step in for her at any one time – she couldn’t set this up so that if she’s unwell, both fill the director responsibilities together.

She would need to make sure they could transact on the fund’s investments and bank account, deal with other providers etc. All of this highlights what is perhaps one of the most important steps – introducing them to the key players in your SMSF’s life well before they actually need to do anything for you.

Alternate directors aren’t used too often with SMSFs because they can create confusion (which name should your accountant put on the tax return, minutes, other key documents? It depends who will be making the decision to sign them!). But in cases like this – where the need is for short term help (albeit from someone who might eventually need long term help) it can be useful. It doesn’t require the existing director to resign / retire and surrender control. It just allows them to have someone else sub in from time to time. And while there is paperwork needed to appoint the alternate, they can step in for their director many times without needing formal paperwork to recognise that each time. It’s evident by the fact they sign resolutions etc.

Many company constitutions also require alternates to be approved by the existing directors – although even if the SMSF already had more than one director, it’s presumably acceptable to them.

Don’t forget that the alternate’s role is entirely dependent on the existing director remaining a director and having capacity. It’s not a permanent solution for someone who may ultimately hand over the reins to (say) their adult child(ren). At that time, the alternate would need to be officially appointed as a director in their own right.

Like every other aspect of life, it’s common for people to seek more and more help in running their SMSF as they age if their capacity declines. An alternate director may well be a great solution for someone just planning for short-term help in the meantime.

 

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.

For more articles and papers from Heffron, please click here.

 

  •   2 April 2025
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