Take the usual SMSF situation where we have a two person fund with two individual trustees. The law states that where a fund has one member, to be defined as a self-managed superannuation fund (See Sec. 17A, SIS Act), it must have at least two individual trustees, one of whom is the member (different rules apply for company trustees).

What happens if one person dies? Well, the SIS Act allows for the deceased member’s legal personal representative (LPR) to act as trustee of the fund, but it does not require that this occur.

In fact, your first point of call is the fund’s trust deed. In many trust deeds we have seen, the rules will contain a clause stating that a person immediately ceases to be a trustee upon their death, or when they become legally disabled (more on this latter situation below). However, the rules for a fund to remain a SMSF still require that the fund have more than one trustee. In fact, the SIS Act specifically provides that a fund will not fail the test if the LPR of a deceased or legally disabled member is a co-trustee with the surviving member during the period of finalising the member’s estate (after which, by necessity, that person ceases to be a LPR). This appointment can occur either automatically upon the memberu’s death (ie. by operation of the deed), or a specific appointment must be made.

As we have pointed out, many deed do not operate to automatically appoint the LPR. In any event, the LPR must cease to be a trustee the moment the benefits commence to be paid to the member, so even a partial release of benefits at an early stage (say, to pay for funeral expenses) would immediately trigger a requirement for them to resign.

So, under a significant number of deeds, the moment a member dies, they cease to be a trustee and the (now one member) fund does not technically meet the definition of a SMSF. The legislation gives the remaining trustee a six month period of grace to rectify this situation before the fund is no longer considered to be a SMSF.

The important point is that under many deeds, the surviving member/trustee can probably control the fund and, in many cases, block the appointment of the deceased member’s LPR to trusteeship while the estate is finalised.

In any event, the remaining member must do something within six months of death, in order for the fund to continue to meet the SMSF definition.

The position is similar when a member becomes legally disabled (eg. they develop dementia, or have a stroke which leaves them legally incapable). Most deeds indicate that they cease to be a trustee from that date. However, in such circumstances, the law allows for the LPR to be appointed after the legal disability occurs. The key point here is that they must be separately appointed, unless the deed specifies otherwise.

So, how does one have an LPR appointed in the case of legal disability? This is a matter governed by the various State and Territory legislation, but typically a person can either execute a power of attorney allowing someone to take over their affairs either immediately or upon the happening of certain events (in this case, health-related). Alternatively, where these arrangements have not previously been made, a person can be statutorily appointed.

Should most trust deeds be changed to automatically have the LPR deemed appointed as a trustee of the fund in the event of a member’s death or legal disability? On balance, the answer is probably, yes. Especially if the fund is one in which two business partners, rather than two spouses are the members. We have also seen many instances where the person’s LPR is not their spouse.