By Liam Shorte 29 Oct 2015

Where will your super death benefit go?

A number of recent court cases have emphasised the importance of getting your estate planning right. We explain what you need to know and what you can learn from the misfortune of others.

Snapshot

  • If you have super, a Will alone is not enough
  • A binding death benefit nomination is a must if you want legal protection
  • We highlight the benefits and pitfalls of different approaches

Estate planning is a tough exercise. It can be complicated, boring and emotional – in any combination. It’s why many of us put it off to deal with at a later date – which never arrives – while others put measures in place but fail to stay on top of them. As a result, intentions are never implemented or the measures implemented fall out of line with the intentions of those who put them in place.

In the 2013 case of Ms Conti (more below) her super account ended up going to Mr Conti – the one person she specifically didn’t want to receive a cent. We’ll look at the case and the lessons for SMSF members, but the key lesson is that estate planning is something you can’t ignore. As we head towards the summer holidays, it might be worthwhile setting aside a few hours to make sure your affairs are in order.

Background

Let’s start by looking at the key elements of superannuation death benefits and estate planning:

  1. Will. Most of us will be familiar with the Will. It’s the document you use to tell your executor (the person who settles and distributes your estate upon your death) where you want your assets to go. A critical point is that your Will won’t cover your superannuation – the trustee of the super fund decides who your super death benefit goes to. In the context of SMSFs (where the other trustee or director is typically a family member or a friend) this can have serious implications.
  2. Binding death benefit nominationsAlso known as BDBNs. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.. If you don’t want the remaining trustee(s) or corporate trustee director(s) making their own decision on who gets your super money, you need to instruct them in a manner that is legally binding. Typically this is done by completing a binding death benefit nominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. (BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.) – a form that allows you to tell the trustee how you want your death benefit to be paid. BDBNs generally lapse after three years although, in the case of SMSFs (if the fund’s trust deed allows it) there’s the possibility of drafting a ‘non-lapsing’ BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. or a special purpose ‘death benefit deed’ with the Trustee to record the way in which death benefits are to be distributed. For instance, the trust deed that will be made available through Eviser Docs (to be launched shortly) offers members the option of making a three year lapsing BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member., a non-lapsing BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. or a death benefits deed. Note though that non-lapsing BDBNs haven’t been tested in court and some advisers don’t believe they are permissible. Because of this and the wide variety of issues you need to consider (for example tax, or a beneficiary predeceasing you) we recommend seeking legal advice on your personal circumstances from an estate lawyer with superannuation expertise.
  3. Non-binding death benefit nominations. A drawback with BDBNs is that they don’t give the trustee any flexibility to, for instance, distribute benefits in a tax efficient manner. So some people prefer a non-binding nomination. But this approach is more of a ‘wish list’ than a ‘direction’. You’re indicating your preferences to the trustee but they’re free to make up their own mind as to how the death benefit is distributed. Non-binding nominations are useful when dealing with independent trustees (for instance, retail or industry super funds), or where you have absolute faith that the trustee will act as you intend. But they don’t offer any legal protection and, in the case of a SMSF consisting of feuding family members, they’re probably useless.

The key point is that if you want certainty about where your super and other assets are going, in the event of your death, you need both a Will and a binding death benefit nominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.. Plus, you need to make sure you seek legal advice on your circumstances to ensure you’ve set things up correctly at the outset. Messing up on the finer details can render your estate planning completely useless.

Let’s turn now to some recent examples of estate planning gone wrong, starting with the case of Ms Conti.

Ioppolo & Hesford v Conti [2013] WASC 389

If you want to read the full judgement (it’s relatively short) you can do so via the link above. The key facts are that:

  • Ms Conti and her husband were individual trustees of a SMSF;
  • Ms Conti passed away, leaving her husband as the sole remaining trustee and member;
  • over the previous decade, Ms Conti had entered into a number of binding and non-binding DBNs (directing her benefit to her husband) but these had all lapsed; and
  • in her Will, Ms Conti had directed that her SMSF balance be paid to her children and she specifically expressed her wish that none of her benefit be paid to the husband.

Ms Conti’s intentions (according to her Will) were clear, but who did her husband (as sole remaining SMSF trustee) decide to pay the benefit to? That’s right. Himself.

The children of Ms Conti (who were also the executors of her Will) challenged the decision. But the Court decided that Mr Conti was within his rights under the law to pay himself the death benefit. Ms Conti’s wishes and directions (as expressed in her Will) had no legal bearing on the decision made by Mr Conti (as trustee of the SMSF).

What might have prevented this situation occurring?

  1. Binding death benefit nominationAlso known as a BDBN. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.. The first answer is a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. (alternatively, a death benefit deed). So long as it hadn’t lapsed, a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. would have compelled Mr Conti to distribute Ms Conti’s death benefit to her children. Alternatively she could have indicated (in the BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member.) that she wanted it paid to her estate (which would have made the proceeds subject to her Will).
  2. Reversionary pension. A reversionary pension would have had a similar effect. In The case for reversionary super pensions we explained that this type of pension automatically passes to a named beneficiary. It’s a bit more complicated than just lodging a nomination form but, depending on the circumstances, it can have tax planning and other benefits on top.
  3. Corporate trustee. The other problem in Ms Conti’s case was the lack of a corporate trustee. The benefit of a corporate trustee in this case might have been that Ms Conti’s shares in the trustee company could have been left to her estate, allowing the executors to appoint a director to the company, who (depending on the company’s constitution) could have vetoed Mr Conti’s desire to pay the super balance to himself. One issue with lapsing BDBNs is that a member may become incapacitated, rendering them unable to execute a new one after three years. In this instance, being able to impose some control over the trustee (and simply being able to trust anyone involved in the management of your SMSF) can be critical.

The Conti case highlights the importance of having a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. in place. But there have been cases since that highlight the importance, not only of a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member., but also getting the legalities exactly right.

McIntosh v McIntosh [2014] QSC 99

In the McIntosh case, a mother was appointed as the administrator of her deceased son’s estate (he died without a Will), which required her to collect her son’s assets and divide them equally between herself and his father (divorced from the mother).

The mother, who lived with the son, was also the named beneficiary of the son’s super (via a non-binding DBN). The bulk of his assets were in his super accounts.

While the mother applied for, and was paid, the super death benefits (by the trustees of three large external super funds), the court ordered that this money be paid across to the estate and shared equally with the father. The court held that her fiduciary duty, as administrator of the estate, required her to maximise its value, contrary to her personal interests.

There are indications that the decision might have been different if the son had made a Will, or a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. had been in place.

Munro v Munro [2015] QSC 61

If ever there was a case that highlighted the importance of dotting your i’s and crossing your t’s, it’s the Munro case (discussed in more detail in Super Snippets: Year to date).

In that case, a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. form filled out by the deceased member was held not to be a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. for the purpose of the fund’s trust deed. This left the remaining trustees free to act as they saw fit.

There were a number of technical issues considered in the case, but a fundamental problem was that the latest form hadn’t been filled in correctly. The member had written that the trustee was to pay his death benefit to the ‘trustee of (his) deceased estate’.

It is reasonable to assume the member intended for his death benefit to be paid to the executors of his estate, to be dealt with according to his Will. However, the form provided clear instructions on how to achieve this – including stating that the death benefit be paid to the member’s ‘personal legal representative’ – and the SMSF’s trust deed required a nomination to be completed in this manner in order to be legally binding. As the form didn’t comply with the trust deed, it wasn’t valid.

The lesson to be learned is that a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. not completed correctly counts for nought (legally speaking). If you slip up on the legalities, any surviving trustee (or director) is free to make their own decisions as to who gets your super balance.

Stock (as Executor of the Will of Mandie, Deceased) v N.M. Superannuation Proprietary Limited [2015] FCA 612

The Mandie case (discussed in more detail in Super Snippets: July 2015) highlights that, even where you have independent trustees, you may still need a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member..

The basic facts of the case were that:

  • Mr Mandie passed away in 2011, leaving three adult children;
  • the daughter was the sole beneficiary under his Will (due, in part at least, to a financial settlement with his two sons years earlier)
  • at the time of his death he had an account with an external super fund, but had no BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. in place;
  • two life policies had been taken out in the super account which provided for the payment of substantial death benefits; and
  • the trustee (who was independent) decided to pay the super death benefits to each of three adult children equally.

The daughter argued that the death benefit should have been paid to Mr Mandie’s estate, which would have resulted in the entire amount going to her. However, the trustee argued that their decision to distribute the death benefits equally to each of the three children was in accordance with their standard practice and was therefore ‘fair and reasonable’ – the standard required of it by the Superannuation (Resolution of Complaints) Act.

The Federal Court dismissed the appeal of the daughter and confirmed the earlier finding of the Superannuation Complaints Tribunal, that the trustee’s decision was valid. The lack of a BDBNThe acronym for a binding death benefit nomination. A BDBN is a document given by a super fund member to the super fund trustee. A valid BDBN legally compels the trustee to pay death benefits as directed by the member. meant the trustee was not required to take into account the apparent wishes of the deceased.

Time to act if you haven’t already

Estate planning is a complicated area and there are lots of trade-offs involved. Certainty for the SMSF member potentially comes at the expense of flexibility to minimise tax, but flexibility can, in situations like Ms Conti’s, see the entire super balance ending up in the wrong hands.

If you’ve been putting off your estate planning, the outcomes in these cases will hopefully spur you into action, particularly if your family affairs are complicated. It’s worth spending a few thousand dollars now to get it right, rather than run the risk of your super balance being distributed in a manner that’s completely contrary to your wishes.

 

Liam Shorte is a principal of Verante Financial Planning Pty Ltd (www.verante.com.au), a corporate authorised representative of Magnitude Group Pty Ltd (AFSL 221557). This article is a general information article and to the extent it contains any financial advice it is general advice only. We recommend seeking personal advice on your own circumstances.

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