Are you a director or a trustee of your business, trust or SMSF? Have you thought about what happens if you get hit by a bus and lose capacity or are out of the country and cannot complete required documents?
When you are running a business or a trust, there is always that lingering concern at the back of your mind about “what if”? What if you lose capacity and you are a sole director? What if you and your partner are the trustees of your SMSF and something happens while you are both overseas? What happens when there is no one there to be make the crucial decisions or pay the bills? Finally, what if you die unexpectedly, without a documented succession plan? What if your estate is held up and the business cannot operate in the meantime?
The answer comes down to ensuring that you have a clearly outlined and legally implemented plan for who will have the delegated power to make these choices in your absence. This is known as a ‘Power of Attorney’.
In essence, a Power of Attorney (or POA), is a formal written instrument that allows one party (the principal) to vest in another (the attorney) the power and authority to perform acts on the principal’s behalf. You may have heard of a Power of Attorney for your personal affairs. However, a personal POA may not be sufficient to deal with your various entities.
Why should you consider implementing entity powers of attorney?
Consider what would happen if one of your business entities owns assets that require active management and you are not able to authorise those decisions. This is a common concern for small and family business owners, where some or all business entities are controlled by a sole individual. This means that often all the business ‘eggs’ are in one basket.
The benefit of an entity POA is that it will apply if the controller of an entity is incapacitated but also in the event of death. This means that day-to-day control and management of business entities can continue in the early days of the estate being administered. For businesses that have employees, contractors, suppliers and accounts to pay, the use of an entity POA will provide peace of mind in an otherwise stressful situation. It also ensures that business assets are protected from claims for payment or breach of contract due to business entities being ‘locked up’ while control issues are resolved.
Finally, an entity POA can give business owners the freedom to finally take that well-deserved break. By planning ahead for business entities to be controlled and overseen pursuant to an entity POA, business owners can rest assured that payments and paperwork are completed in their absence.
Why can’t you use your personal power of attorney?
There is a misconception that if you have a personal POA that the person(s) you have appointed can act in any capacity for you (including your position as a director or trustee). However, this is not necessarily the case. For example, if you are a company director you cannot delegate this responsibility to an attorney.
You should keep in mind that there are specific rules that apply to SMSFs that are governed by superannuation laws and regulations. For your SMSF, your personal POA can be relied upon by your attorneys. However, the person(s) appointed under your personal POA may not be who you wish to step in to control of your SMSF on your behalf.
We recommend that you engage a solicitor to advise you on documenting your POA to ensure the appointments and powers are as you intend.
When do you need an entity power of attorney?
You should have an entity specific POAs if:
- You are a sole director of a company that runs some or all of your business;
- You have a corporate trustee with a sole director or 2 directors;
- You have a SMSF trustee company that has a sole director or 2 directors and you want to make specific directions about control of the SMSF or appoint someone different to your personal attorney to step into control of the SMSF; or
- Your company has active requirements (like wages and accounts to pay).
You may not need an entity specific POA if:
- The relevant entity is a Trust and the Trust Deed (or a document that supplements the Trust Deed) contains successor appointments if you lose capacity;
- If the entity only has passive assets;
- The entity does not need to regularly pay bills or make other payments; or
- You are happy to rely on your personal POA for your SMSF.
Entity powers of attorney do not have to be broad and all-encompassing. A common concern that people have is if an entity is in the process of purchasing property or transacting on a specific deal. If the entity is unable to complete the necessary documents to execute the settlement, there is the risk that the settlement could fail, or your entity could incur unnecessary expenses or penalties. To remedy this, some people like to put in place entity specific POAs limited to the particular transaction or for a specific purpose. This strategy is commonly used when sole directors will be travelling or uncontactable over the course of a transaction.
How do you do it?
Putting in place an entity POA will differ depending on whether the entity is a company, the trustee of a trust or the company trustee of a SMSF. In short:
- A company requires the use of legislation and a POA deed. Some states have established forms to complete.
- Trusts require the addition of a specific authority to appoint an attorney under the Deed. Therefore, it is important to check whether the Deed actually allows you to make the appointment. Otherwise, the entity POA may be found invalid or ineffective.
- As above, SMSFs are subject to superannuation laws and regulations but the terms of an attorney’s appointment to a SMSF company trustee should be considered before the document is signed.
Who should you appoint?
You can appoint a person if they are over the age of 18 years old, an Australian resident and have legal capacity. You may also appoint a company (in some circumstances) as attorney. Similar to a personal POA, you can appoint more than one attorney and you can dictate how they act (either jointly or jointly and severally).
As this appointment can relate to more than just your personal affairs and can impact other people, like employees, it is important that you choose an attorney with the appropriate level of experience and that they are not subject to any potential conflicts of interest.
Incorporating both personal and entity specific POA(s) is just one piece of the puzzle. To safeguard your business, trust or SMSF, it's essential to align your POA(s) with your succession plan. It can be tempting to postpone thinking or implementing these kinds of things or believing that someone will sort it out. Don't leave these crucial decisions to chance. Small and family business owners should think proactively about how business entities interact with one another and who will step in should the need arise.
