As life expectancies increase, dementia will become an ever-more important issue. The good news is that it's normally a condition that progresses slowly, thus giving families plenty of time to prepare for it. The bad news is that there is no current cure, and that many people move to avoidance, instead of preparation, and thereby leave themselves at risk of huge problems down the track.
So it is critically important for people to put an Enduring Power of Attorney (EPA) in place long before they appear to be needed. The person giving the EPA must have capacity to do so. My legal friends tell me that an early diagnosis of dementia is not necessarily evidence of lack of capacity, but as dementia progresses, there must obviously come a time when capacity to make an EPA has been lost. So why take the punt - get it done now.
Don't fall for the myth that your spouse or next of kin can make financial decisions on your behalf in the absence of an Enduring Power of Attorney. That's a dangerous delusion: in the absence of an EPA the only decision-maker will be a tribunal, and legal costs will almost certainly be involved.
The absence of an Enduring Power of Attorney can cause problems if a family has a self-managed super fund. The regulations require all members of the fund to be trustees, but they also prohibit a person without capacity from being a trustee of the fund. If an EPA is appointed and the member becomes incapacitated, the incapacitated person can remain a member, and the EPA can become the trustee. Without an EPA, the fund will be relying on a tribunal to make important decisions.
While Enduring Power of Attorneys can be set up using a standard form, this is often inadvisable. A common issue is that, under standard EPA clauses, an attorney cannot take an action to benefit themselves. While this seems sensible, when the attorney is a spouse or family member, it can cause problems.
Think about a situation where a couple jointly own an expensive property, one party loses capacity, and it becomes necessary to sell that home and move to another one. An EPA would facilitate the process, because an incapacitated person would not have the power to sign a contract. But if the family is best advised to put the new property solely in the name of spouse with capacity, this transfers one spouse's assets to another, and is a possible conflict of interest. A customised Enduring Power of Attorney can handle this in advance by having a more nuanced conflict of interest clause in the EPA document.
The next issue is a Binding Death Benefit Nominations for your super fund. These are well worth having in certain cases when a member of the fund dies, but some of these nominations have to be renewed regularly. While incapacity does not revoke such a document, it may be necessary to renew it before it lapses. An incapacitated person cannot take this action, and there is some doubt as to whether their EPA has the power to do it. The consensus appears to be that it depends on the wording of the trust deed.
A major issue, which often causes difficulty, is who to choose as the Enduring Power of Attorney. The spouse is often the first choice, but they may also lose capacity as they age. This can be got around by appointing some or all the children, but it is essential to consider family conflicts that may arise. These can culminate in some huge family fights, possibly ending in legal action. The person appointed must be someone you trust to make decisions on your behalf, and sometimes a non-family member may be a wiser choice.
What I have written is just a taste of the many issues that can arise if essential estate planning documents are not completed. Treat this as a wake-up call to seek expert advice, and get your affairs in order as a matter of urgency.
Question: My wife and I are self-funded retirees with both superannuation balances under the $1.6m cap. If one of us passes away, the surviving partner will be pushed over that limit through the inheritance. Are there any provisions or conditions that accommodate this circumstance? For example, will the surviving partner be given permission to exceed the limit or allowed time to bring their super back under the $1.6m?
Answer: The surviving partner will be able to rearrange their affairs so that $1.6 million ends up in pension mode, and the balance in accumulation mode, and a reasonable time will be allowed to do that. But bear in mind that money in accumulation mode pays tax on its income at 15% flat, whereas money held in a person's own name has the benefit of the $18,200 tax-free threshold. This is why the surviving partner should take advice about holding as much of the legacy in their personal name as is appropriate. A further benefit of doing this is that money held outside super is not liable for the death tax of 17% on the taxable component of superannuation left to a non-dependent.
Question: I have a question about the death tax on superannuation. I am single, and have an adult daughter who is a single stay-at-home mum and a son who works. Neither are dependent on me. My instructions to my super fund are that my super is to be left equally to my two children. The taxable component is $180,000. Am I right in my assumption that they will pay 17% death tax?
Answer: They will certainly pay the death tax but there is a solution. Make sure you have given an Enduring Power of Attorney to a trusted person and have given the attorney instructions to withdraw your entire superannuation balance and deposit the money in your bank account tax-free if your death appears imminent. This will get rid of any possibility of the death tax.
- Noel Whittaker is an Australian financial planning expert and the author of Making Money Made Simple. Send your personal finance questions to firstname.lastname@example.org