The investment around this alternative asset has caught the attention of older investors as the ATO’s SMSF numbers attest, reassured by the entry into the market of established asset managers such as Blackrock and Fidelity.
Labor failed to get its legislation to tax the earnings on SMSF portfolios exceeding $3 million pass the Senate in the previous Parliament. With the Greens likely to support this Bill, it is now set to become law, and advisers are scrambling to devise strategies for their clients.
Ageing seniors with SMSFs are ‘at risk’ from family, advisers
Self-managed super fund (SMSF) members with declining mental capacity, typically because of ageing, are creating a “honey pot” for unscrupulous family members or advisers, according to investment specialists and lawyers.
Anna Hacker, client director for Pitcher Partners in Melbourne, warns that failure to protect the fund assets of affected members is often the “big missing piece” from estate advice intended to protect members at risk of making the wrong decision.
Darryl Browne, a lawyer with Browne Linkenbagh Legal Services, adds: “An ageing population, increasing dementia and affluence make SMSFs a potential ‘honey pot’ if there is no one actively engaged in monitoring the assets.”
The Australian Taxation Office’s supervisory role adds to the vulnerability because its primary focus is taxation rather than security and prudential issues, meaning it could take a lot longer to detect irregularities, Browne says.
There are about 610,000 SMSFs with more than 1.1 million members managing assets totalling just over $1 trillion, or about 25 per cent of the nation’s total superannuation pool, according to the SMSF Association, a professional body representing the sector.
More than 70 per cent of members are aged over 55 years, with the median age about 61 years and around 15 per cent aged more than 75 years, analysis shows.
The nation’s rapidly ageing population is adding to an estimated 400,000 suffering from dementia, with the vast majority being older adults, according to the Australian Institute of Health and Welfare.
For example, applications seeking orders to assist adults lacking capacity have increased by five per cent for each of the past six years, according to the NSW Civil and Administrative Tribunal.
Medical specialists warn that symptoms of cognitive decline, such as memory loss, can be happening for up to 20 years before becoming so obvious that action is required.
Browne warns managing a SMSF requires complex decision-making involving investments, compliance, super laws, arranging pensions and tax. “Where a member has declining capacity, or signs of dementia, this increases the risk of making the wrong decision as the members control the SMSF,” he says.
A trustee with dementia cannot legally retain that role, with breaches resulting in penalties, including loss of concessional tax treatment, according to the SMSF Association.
But the incapacitated person can remain a member of the fund if another person acting as an enduring power of attorney take their place as trustee, it advises.
An enduring power of attorney is a legal document allowing another person to make financial decisions on the former trustee’s behalf. A written record of the appointment must be held with the fund’s records.
If the incapacitated person is the only member, or key decision maker, then an administrator might need to be appointed, adds Hacker.
Strategies to consider:
- Create a corporate trustee where a company, rather than individuals, act as the trustee of the fund. It offers additional protection by separating members’ personal assets from the SMSF. Does involve additional set-up and on-going costs.
- Appoint a power of attorney to asset financial management. It is recommended to specify their scope of powers and how property will be managed if the former trustee can no longer articulate their wishes. Some members appoint two attorneys to provide checks and balances. The attorney should also keep track of bank accounts, investments and other assets.
- Empower an adviser or accountant to monitor older trustees for signs of decision-making difficulties.
- Include an advance care directive, a legal document explaining how medical decisions are to be made when a person is no longer capable of communication.
- Get the affairs in order. Discuss with bank setting up direct debits and pre-authorised bill payments.
- Review trustee structure and succession plans before it is too late.
