SMSF Succession Planning: What Happens if a Trustee Loses Capacity or Passes Away?

Managing a Self-Managed Super Fund (SMSF) already requires care, documentation, and steady decision-making. The real test often appears when a trustee becomes incapacitated or passes away. These moments can disrupt the structure of the fund, affect compliance, and create immediate practical issues with property loans, banking access, and investment management. Understanding what happens if an SMSF trustee becomes incapacitated or passes away is an essential part of responsible fund management, especially when your SMSF holds property under a limited recourse borrowing arrangement.

In this guide, we at Ausfirst Lending Group explain how trustee changes work in Australia, what documents shape the process, and how you can prepare your SMSF for major life events. We also highlight how lender requirements may change and the steps that help prevent delays, disputes, or compliance risks.

Why Incapacity Or Death Planning Is Critical For Every SMSF

SMSFs operate under strict rules set by the ATO and Superannuation Industry (Supervision) Act 1993 (SIS Act). One of the cornerstone requirements is that all members of the fund must also be trustees or directors of the corporate trustee. This keeps control within the fund and ensures members are actively involved in decision-making.

When a trustee becomes unable to act due to injury, illness, or cognitive decline, or when a trustee passes away, this structure can be disrupted. Without a clear plan, an SMSF may experience delays in paying bills, managing property, or meeting lending obligations. This is especially important if the fund has purchased residential or commercial property through a loan arrangement, where repayments and documentation must remain in order.

What triggers a loss of trustee capacity

A trustee can lose capacity due to medical conditions such as dementia or stroke, serious injury, cognitive impairment, mental illness that affects decision-making, or a court order declaring them unable to manage financial affairs. Capacity loss does not need to be permanent. Even short-term incapacity can prevent a trustee from signing documents, approving transactions, or communicating with auditors, banks, or lenders.

How this affects fund operations

When a trustee becomes incapacitated or dies, the fund may temporarily lose the ability to act. Bank accounts may need new authorised signatories, auditors may request updated documents, and lenders often require evidence of trustee changes before recognising the SMSF loan. Property expenses still need to be paid, pensions may continue, and death benefits must be managed. The ATO expects SMSFs to maintain correct trustee arrangements at all times, so any change must be addressed promptly.

Why early planning supports stability

Strong planning creates clear pathways for replacement trustees, keeps banking and loan management running smoothly, and reduces the risk of SMSF compliance issues. It also helps avoid delays for beneficiaries and supports consistent communication with lenders and auditors. Preparing early makes the SMSF more resilient when unexpected events occur.

Understanding The Rules And Who Can Step In As Trustee

When a trustee becomes incapacitated or passes away, the SIS Act provides specific rules about who may step in. The direction you follow depends on your SMSF structure and the documents already in place.

The role of an enduring power of attorney in an SMSF

Under SMSF law, a valid enduring power of attorney allows someone to step in and act as trustee if a member loses capacity. An attorney can take on the member’s role and manage their responsibilities, provided the trust deed allows the appointment and the attorney meets the required eligibility rules. This arrangement helps the SMSF continue operating and ensures decisions can still be made when a member is unable to act.

Key points:

• Only an enduring power of attorney is accepted, not a general or medical power.
• The appointment must follow the trust deed wording.
• The attorney agrees to take on trustee responsibilities.
• The attorney must meet all trustee eligibility rules under the SIS Act.
• The appointment must be documented with minutes and updated ATO records.

Requirements for funds with individual trustees

Where an SMSF uses individual trustees, control changes tend to involve more manual steps. When a trustee becomes incapacitated or passes away, the fund must update its trustee structure, follow the trust deed instructions, and ensure all records remain accurate. Individual trustee arrangements often involve more paperwork because property and asset titles are held in each trustee’s name, which means updates may be required across multiple documents and accounts.

Key considerations for incapacity:

• The EPOA can be appointed as a new trustee.
• Remaining trustees must approve the appointment.
• Documents, titles, bank accounts, and lender records may all need updating.

Key considerations for death:

• The legal personal representative (LPR) may step in temporarily.
• The LPR must be able to administer the deceased member’s portion.
• The trust deed dictates the timeline for permanent changes.

Requirements for funds with a corporate trustee

A corporate trustee often makes SMSF administration simpler because members act as company directors, not individual trustees. When a trustee becomes incapacitated or passes away, updates are usually easier to manage, and property titles generally do not need changing. Lenders may still ask for updated records, but the overall process tends to be more streamlined.

Key considerations during incapacity or death:

• The EPOA may be appointed as a director.
• The deceased member’s LPR may act as director temporarily.
• Asset titles usually stay in the company’s name.
• Lenders may still require director updates and identification.

How lenders respond when trustee changes occur

Lenders usually need to confirm that the SMSF is still compliant and that the people acting for the fund are legally authorised. Depending on their policy, they may ask for certified copies of the EPOA, updated trust deed pages, or new identification checks. Loan documents might need to be amended to show the new trustee or director, and lenders often request minutes confirming the change. Some may also review the fund’s overall compliance position before proceeding.

Delays or gaps in documentation during these transitions may create complications for the fund, especially where loans are involved. Gaining an understanding of the SMSF loan default process can help you anticipate how lenders might respond in less common situations.

Clear documentation and early planning help prevent delays and reduce the chance of administrative issues during these transitions.

Planning For Incapacity: Practical Steps SMSF Members Can Take

Planning for incapacity is a key part of SMSF succession preparation. It helps prevent disruption, supports compliance, and keeps the fund running smoothly if a trustee can no longer act, especially when SMSF property investment or loan obligations need ongoing attention.

1. Use an EPOA to avoid unintended breaches

A valid enduring power of attorney allows someone you trust to manage SMSF duties if you lose the ability to act. It helps maintain control of the fund, supports continuity in banking and loan management, and gives lenders clear authority during transitions. It also reduces the risk of the SMSF being forced to wind up unnecessarily. Many SMSF legal and accounting professionals recommend that every member have an EPOA in place, especially when the fund holds property.

2. Check your trust deed for incapacity rules

Trust deeds vary, and many older deeds do not clearly address temporary incapacity, appointment or removal of trustees, attorney powers, director changes, or successor arrangements. Before incapacity occurs, it is worth confirming that your deed allows an EPOA to step in, explains how replacement trustees are appointed, outlines documentation requirements, and aligns with common lender expectations. A clear, up-to-date deed prevents confusion during stressful times.

3. Ensure clear access to SMSF banking, loan records, and investments

If a trustee becomes incapacitated, their attorney or replacement needs fast access to banking details, loan statements, property invoices, insurance information, and auditor correspondence. Centralising these records helps the SMSF continue operating smoothly and reduces the impact of unexpected disruptions.

4. Coordinate with lenders during trustee updates

Lender requirements often change when a trustee is replaced, and this is where we can help. As SMSF mortgage brokers, we assist by clarifying what documentation a lender may request, preparing updated identification or trustee evidence, and communicating with lenders throughout the transition. We can also check whether your loan terms remain compliant after trustee changes and review how future refinancing plans might be affected.

What Happens When An SMSF Trustee Passes Away

The death of a trustee triggers immediate responsibilities for the fund. The SMSF must remain compliant, continue managing investments, and begin the process of paying death benefits where required.

Immediate operational requirements

When a member passes away, the SMSF must remain compliant and ensure the fund continues operating while trustee changes are addressed. Authorised decision-makers need to be confirmed, and death benefit administration must begin according to the trust deed and any valid nomination. If the fund has an SMSF loan, repayments must continue without interruption, and lenders may ask for updated trustee information.

When a member passes away, the SMSF must:

• Notify the auditor.
• Notify the ATO through updated trustee details.
• Ensure fund operations continue.
• Confirm who is legally authorised to act.
• Begin death benefit administration in line with the deed and any nomination.

When an executor or legal personal representative may act

Under the SIS Act, an executor or legal personal representative can step in as trustee or director after a member passes away. They take on this role temporarily so they can administer the deceased member’s benefits and ensure the estate is treated correctly. They must still meet all trustee eligibility rules, and their authority continues only for as long as needed to complete the deceased member’s entitlement.

How corporate trustees simplify death-related changes

In an SMSF with a corporate trustee, the executor may be appointed as a company director during the transition. Asset titles usually remain unchanged because they are held in the company’s name, which reduces the amount of administrative work required. Lenders may ask for updated director details, but title changes are rarely needed. The trust deed determines who can become a director and when, which helps avoid time-consuming property title updates.

How death affects property loans, contributions, and pensions

When a member passes away, their contributions stop immediately, but property income still needs to be managed and loan repayments must continue as usual. Any existing pension may need review to ensure it remains compliant. Liquidity can become an issue if the fund must pay death benefits, especially when the SMSF holds property or other illiquid assets. This is why death benefits must be paid as soon as practicable, and why trustee changes must be handled quickly and accurately.

Binding Death Benefit Nominations And How They Work

A binding death benefit nomination tells the trustee who should receive a member’s super when they pass away. In an SMSF, the trust deed sets the rules for how the nomination is made and how it must be followed.

Difference between binding, non-binding, and non-lapsing nominations

• Binding nominations – These require the trustee to pay benefits to the nominated beneficiaries if the nomination is valid and consistent with the trust deed.
• Non-binding nominations – These provide guidance but still allow the trustee to decide how the death benefit is paid.
• Non-lapsing nominations – These remain in place indefinitely if the trust deed allows them, reducing the need for regular updates.

Who can receive an SMSF death benefit

Under Australian superannuation law, only certain people can receive an SMSF death benefit. The rules are strict, and benefits cannot be directed to friends or unrelated adults. Payments must go to someone who meets the definition of a dependant or to the member’s estate, depending on the trust deed and any valid nomination.

Death benefits may only be paid to:

• A spouse or de facto partner.
• Children of any age.
• A person in an interdependent relationship.
• The member’s estate.

Time limits, renewal rules, and deed requirements

The trust deed sets the rules for how a binding death benefit nomination operates. It generally outlines whether the nomination lapses, how often it must be updated, the required witnessing process, and whether a specific form must be used. The deed also explains how the trustee should administer the nomination after a member passes away. If there is ever a conflict between the deed and the nomination, the deed usually prevails.

How nominations interact with SMSF property loans

Death benefits often need to be paid promptly, which can affect funds that hold property or other illiquid assets. Trustees must check whether the SMSF has enough liquidity to meet benefit payments, as rental income alone may not be sufficient. If needed, they may need to consider selling assets or reviewing whether refinancing is possible under lender policy. Clear nominations help reduce delays and support a smoother transition during this process.

Common Risks When There Is No Succession Plan

Without a solid succession plan, an SMSF can face practical and compliance issues that slow down decisions and place extra pressure on remaining trustees and beneficiaries, especially when urgent actions are required.

Delays in accessing super balances

Delays often occur when death benefit nominations are unclear or invalid, when trustees cannot agree on next steps, or when executors are appointed late. Conflicts between the trust deed and the member’s intentions can also hold up payments. These setbacks create uncertainty for dependents who may rely on timely access to the benefit.

Disputes between family members or co-trustees

A lack of planning can create disagreement about who should take control of the fund, how benefits should be managed, or how to interpret older trust deed clauses. These disputes can quickly escalate and may slow down SMSF administration, especially when property or complex investments are involved.

ATO compliance issues

If trustee changes are not documented properly, the SMSF may fall out of line with SIS Act requirements. This can lead to ATO penalties, loss of concessional tax treatment, or breach reports from the auditor. Keeping trustee records current and accurate is essential for protecting the fund’s compliance status.

Complications for SMSF loans

When a trustee is replaced, lenders often need updated trustee or director details, revised loan documents, and confirmation that the SMSF remains compliant. Delays in providing this information can affect refinancing, fixed-rate rollovers, or ongoing loan administration. Clear planning helps prevent disruptions and keeps loan obligations on track.

Secure Your SMSF’s Future With the Right Preparation

Planning for incapacity or death within an SMSF is ultimately about keeping your fund stable and your long-term strategy intact. A clear succession plan helps protect your beneficiaries, maintains the fund’s compliance position, and reduces the risk of delays that can affect property or loan management. Bringing everything together at this stage helps you close the loop on the responsibilities that matter most.

If you’re preparing to borrow or refinance within your SMSF, our role is to help make the lending process clearer and more predictable. As a mortgage broker in Queensland, Ausfirst Lending Group can help you review lender requirements, understand what documentation may be needed during trustee changes, and assess how future planning may affect your SMSF loan options.

Good planning strengthens both the fund and its members. If you’re ready to explore your SMSF lending options, we’re here to help you take the next step.

Frequently Asked Questions (FAQs)

1. Can an SMSF still operate if the remaining trustee lives overseas after someone passes away?

2. What happens to an SMSF’s bank access if the only active signatory becomes incapacitated?

3. Can an SMSF pay for legal or accounting costs related to succession planning?

4. What happens if a trustee refuses to step down after losing mental capacity?

5. Can an SMSF delay paying death benefits if most of the fund is invested in property?