Many Australians operate businesses or hold assets in family discretionary trusts. The trustees of the trust can be individuals or a company. If the trustee is a company, its directors are often the primary beneficiaries of the trust.
Many Australians are also setting up Self-Managed Super Funds (SMSF), which are a special form of trust. Again, the trustees of the trust are either the individual members of the SMSF or a corporate trustee with the members of the fund acting as directors of the company.
Both kinds of trusts have ongoing legal and administrative requirements. However, the aging population means more Australians are experiencing the effects of dementia which means increasing number of Australians are losing capacity to make legal and financial decisions. However, such Australians may still hold positions of considerable power in relation to family trusts or SMSFs.
First, a word about Trusts
A trust is created by a Deed. All trusts have a trustee and beneficiaries for whom the trust is created. A trust also has an appointor who has a significant role in the trust. For example, an appointor has the power to hire and fire the trustee. Often, the appointor can also give directions to the trustee, alter the beneficiaries of the trust or alter the proportions in which beneficiaries will benefit under the trust. In many cases the appointor can appoint himself or herself as trustee of the trust and take effective control of the trust.
What if I lose capacity and I am a trustee or director of a corporate trustee or the appointor of a trust?
The person you appoint under an Enduring Power of Attorney is able to exercise all the powers you lawfully have. This means your attorney can sign contracts on your behalf, buy and sell real estate, buy and sell shares and make investment decisions on your behalf. An appointment under an Enduring Power of Attorney means your attorney can continue to act on your behalf if you lose capacity due to mental incapacity or unsoundness of mind.
The one thing an attorney cannot do is step-in and exercise any functions you may have as trustee of a trust. However, in the recent case of Belfield v Belfield  NSWCA 416, the NSW Court of Appeal confirmed that an attorney can exercise a person’s function as an appointor of a trust. Given the breadth of an appointor’s power, it is crucial that you choose the right person to be your attorney.
What happens if I am a trustee of a SMSF and I lose capacity?
The picture changes somewhat for a SMSF. Members of the SMSF must be trustees of the fund or directors of the corporate trustee. If a trustee or director loses capacity, the person he or she has appointed as attorney under an Enduring Power of Attorney can step-in and be appointed trustee of the SMSF or director of the corporate trustee of the SMSF. Once appointed, the attorney carries out his or her functions in relation to the fund as trustee or director of the trustee company. That is, the attorney acts in a personal capacity and not as the attorney under an Enduring Power of Attorney.
Clearly, the choice of attorney should be made with great care because your attorney may end up controlling the SMSF. For example, the new trustee or director can make investment decisions; decide whether a benefit is to be paid to a member of the fund; and, if there is no Binding Death Benefit Nomination* in place, decide to whom a deceased member’s death benefits are to be paid. The new trustee or director may also receive benefits from the fund like any other member.
At Turnbull Hill Lawyers, we can help you choose the most appropriate person to appoint as your attorney as part of your overall estate plan. We can also advise you with regard all the functions your attorney may be able to carry out in your place.