Speaking at the SMSF Association National Conference in Brisbane last week, Mr Herd said litigation is starting to be dominated by disputes over estates and enduring powers of attorney, especially regarding capacity.

“It beats any other legal recourse and a lot of it turns on the issue of capacity, or incapacity and the technicalities that pervade in the area of super funds,” he said.

Mr Herd added there are very few states in Australia that have a statutory definition of capacity, and the issue of capacity can be difficult and complex due to the overlapping of state and Commonwealth law. However, there is now a process of mutual recognition which means all states and territories are meant to recognise enduring powers of attorney.

Understanding the laws and documents that are relevant in the SMSF space regarding EPOA can be a juggling act and involves the Superannuation Industry (Supervision) Act as well as state and territory laws, but the most important document is the SMSF trust deed.

“If a member of an SMSF has lost capacity, it starts to create this imbroglio because an EPOA can replace the director of a corporate trustee, replace a trustee and can make decisions for the member of the fund and fiddle with death benefit nominations,” Mr Herd said.

“If you have an old trust deed, that's a problem. because back in the 1950s and ’60s and even the ’70s nobody who drafted trust deeds ever contemplated for the members of that trust to lose their capacity, all they ever contemplated was death.”

He said older trust deeds don't allow for a mechanism to replace a trustee of a super fund who has lost their capacity.

“So trust deeds are of vital importance when it comes to assessing the role of an EPOA in an SMSF,” he said.

“It’s also important to understand that when an EPOA replaces that trustee who has lost capacity, they become the trustee in their own right, not as an agent or a decision maker – they literally stand in the shoes of that incapable trustee.”

Some measures can be put in place to mitigate these issues, Mr Herd said, including inserting conditions and terms in the trust deed.

“One of the terms and conditions that should be considered in an EPOA is a waiver of conflict of interest clause,” he said.

“It’s a powerful clause. It doesn't have to be very long. It's one sentence, but it overcomes all these issues about the invalidity of transactions or documents done by an EPOA.”

Another clause that should be considered authorises the EPOA to make changes, revoke or fail to make or revoke death benefit nominations, which Mr Herd said he often raises in situations with blended families.

“We ask clients to contemplate the issue of inserting provisions in the EPOA about the self-managed super fund and the death benefit. It's a projection forward, trying to contemplate the waves without going too far.”