In a recent blog update, Heffron managing director Meg Heffron said that the situation in 2021 is profoundly different from the time when “old people” rarely had SMSFs and it was even rare to see funds that paid pensions. 

She noted in 2021, there are more funds, larger funds, and many funds with large balances but aging members. There are very good reasons to keep those funds going but there is an ever-present challenge as to how to manage them as the members age.

“Of course, ‘ageing’ doesn’t automatically render anyone incapable of managing their own SMSF,” Ms Heffron said.

“Some may choose to (and be capable of) managing their own fund up until the end. Others will find their interest or capacity or both wane over time. But for those in the latter camp, what are the options?"

The conventional protection is to ensure that all parties have an enduring power of attorney in place. At the right time, the attorney steps in as trustee (or director of the trustee company) in place of the member. 

"That way: the fund continues uninterrupted, the members remain the same, but ‘someone else’ (or even several other people) take over the work of managing the fund and making decisions about where to invest, how to respond to legislative changes, what suppliers to use etc.

“I think this is still the right long-term approach. And my personal (and professional) view is that when you have an SMSF, you should have an enduring power of attorney for exactly this reason.”

But even if this is the right long-term solution, the great challenge has always been finding the right moment to make it happen, according to Ms Heffron. In cases where the attorneys are adult children, the handover can be tricky.  

“If it’s too early, there is a risk that the members (their parents) feel disempowered even though they made the decision. Getting older sees so many markers of autonomy taken away, why make that worse unnecessarily?" she noted.

"But if it’s done too late, it may be much harder to put into place and cause even more angst. 

“So it would appear that there is a Goldilocks zone of ‘not too soon and not too late’. But how would anyone judge that? And does it mean waiting until the parent either asks to be relieved of the responsibility and workload or is clearly declining mentally? And who would make the call about their capacity (or otherwise) to run their SMSF?”

Perhaps a better approach, Ms Heffron noted, would be to initially include the children (assuming they hold the enduring powers of attorney) as members and trustees – joining their parents as equals.  

“This raises all the usual challenges of control but in reality these are coming anyway. What it does potentially achieve is a gradual shift of power rather than a fixed transition date,” she explained.

“It gives the parents time to share their insights and experience on how things should be done and the adult children time to adjust to their new role. It also means that if the parents do eventually lose capacity, the alternative arrangements are already in place. (This is why it’s important that the enduring power of attorney documentation is in place from the start even if it’s not needed immediately).

“For larger families (more than two children), this is where the new six-member fund rules might be a perfect solution. They provide more scope for all children to belong to the fund (assuming that’s the preferred outcome) and take on this transition.”

This comes as a law firm flagged that there is considerable interest regarding many SMSFs wishing to add members since the beginning of the financial year.