The client then asked whether such an arrangement could cause complexities for her SMSF on her incapacity or death.

In response, Ms Formica said an SMSF member’s legal personal representative (LPR) can play an important role in the operation of the SMSF should they lose mental capacity or die.

“If an SMSF member becomes legally disabled, they will no longer be fit and capable of acting as an individual trustee or a director of the fund’s corporate trustee. To allow for the smooth running of the fund, they should immediately be removed from that position,” Ms Formica said.

“Note that their removal should be done in accordance with the governing rules (in the case of an individual trustee) or the constitution of the corporate trustee (in the case of a director of the corporate trustee).

“However, such an individual can still be a member of the SMSF, provided their LPR (in this case, their attorney under an enduring power of attorney) is an individual trustee/director of the corporate trustee in their place.”

Ms Formica said that, similarly, if an SMSF member dies, the fund will not fail the SMSF definition if the member’s LPR (in this case, their executor or administrator of their estate) is an individual trustee/director of the corporate trustee in place of the member in the period from date of death until the death benefit starts to be paid out of the fund.

She said there is generally a six-month “grace period” in which the fund could technically fail the SMSF definition following the cessation of the individual’s trusteeship or directorship due to their death, or their removal due to incapacity, but the failure will be disregarded.

“Importantly, this does not mean that a member’s LPR will automatically become an individual trustee/director of the corporate trustee on the member’s death/incapacity, nor is the SMSF required to restructure its trusteeship/directorship to do this (unless required under the governing rules/constitution),” Ms Formica said.

“It just means that if an LPR is appointed as an individual trustee/director of the corporate trustee in place of the deceased/incapacitated member, doing so will not cause the SMSF to fail the SMSF definition.

“Note that, once appointed, the LPR is a trustee/director of the corporate trustee in their own right with legal powers and responsibilities and they will remain in the role until such time as they resign or are removed (in accordance with the governing rules/constitution).”

To ensure their wishes are followed, Ms Formica suggested that SMSF members may need to consider putting in place a binding death benefit nomination and/or reconsider their choice of LPR.

“At the very least, SMSF members should be aware that if their LPR is appointed as an individual trustee/director of the corporate trustee, the LPR’s appointment in this position does not automatically end when their role as LPR ends,” Ms Formica said.