Nathan Yii, Principal Lawyer at Nathan Yii Lawyers, shares some tips to deal with SMSF disputes, by looking at superannuation in the estate plan, control and benefit on death, trustee discretion and the payment of death benefits and other issues. He will delve further into this topic at the Wills and Estates Symposium 2021 on Wednesday 3 March 2021, and again at the Saturday 10 Points in One Day on Saturday 20 March 2021.
Introduction
In an ageing population, it is common for families to have accumulated a great deal of their wealth in superannuation over the years. For some, superannuation may be their largest asset, second to their family home. It is very common these days to see individuals hold their retirement savings in self-managed superannuation funds (SMSFs) to invest in real estate, shares or other cash investments.
Addressing superannuation in the estate plan: the use of binding death benefit nominations
When dealing with superannuation in the estate and succession planning context, Wills and powers of attorney alone are not sufficient. Superannuation is not automatically taken into account under a Will and issues of benefit and control must be addressed. The trustee, in the absence of a binding death benefit nomination, will have the discretion to pay the deceased member’s “death benefits” generally to a surviving spouse, child, financial dependant or the deceased’s estate under superannuation law. This broad potential beneficiary class may of course be mirrored in the SMSF deed or even narrowed under a more tailored deed as part of one’s estate plan.
SMSF deeds commonly allow nominations (binding and non-binding) to be made. If a member wishes to make a binding death benefit nomination, it is absolutely critical that any prescribed procedures under the SMSF deed are followed, failing which the binding nomination could be later challenged for invalidity. Furthermore, older trust deeds may only allow “lapsing” nominations to be made, which lapse after 3 years of their making (and thus become non-binding on the trustee). Case law (eg Re Narumon Pty Ltd [2018] QSC 185) has confirmed that SMSF binding nominations are not subject to the 3 year lapsing period. This is of course, subject to the terms expressed in the deed of the SMSF in question.
As part of the estate planning exercise, practitioners must keep a look out on these issues and must not simply “fill in” binding death benefit nomination forms in the hope that they will be binding on death, without reviewing the trust deed.
Control and benefit on death
In the SMSF context, control is held by the trustee. Often the surviving trustee is the deceased’s spouse as the surviving member of the fund. Sometimes the surviving trustee is the deceased’s child. Very often, the executor steps into the trustee’s role, particularly to maintain superannuation compliance on death. If there is a valid and binding death benefit nomination, the trustee must follow that nomination and distribute the death benefits as soon as practicable after the deceased’s death. The issues of control post-death must be properly addressed at the estate and succession planning stage – the saying “possession is nine tenths of the law” rings very true.
Apart from invoking the NSW notional estate rules, it has been difficult for a disgruntled beneficiary to bring superannuation into an estate dispute. This is particularly the case given that superannuation is a non-estate asset, and the member may direct the trustee to pay the death benefits away from the estate, under a valid binding nomination. Of course, if there is no valid binding nomination, the trustee may decide to pay the death benefits away from the estate by exercising discretion under the trust deed. In recent times, claimants have been increasingly wanting to “widen the pie” and have found means of including superannuation in a dispute for example, in cases where the validity of nominations has been questioned and/or where trustee discretion needs to be exercised.
Trustee discretion and the payment of death benefits
When exercising trustee discretion in the absence of a valid binding nomination, full control rests with the trustee – whoever that might be. Common scenarios include where:
- The surviving trustee or its director is also a beneficiary able to directly receive death benefits in their personal capacity;
- The surviving trustee is or is controlled by the deceased’s executor who is not a beneficiary eligible to directly receive death benefits in their personal capacity; or
- The surviving trustee is or is controlled the deceased’s executor who is a potential beneficiary able to receive death benefits in their personal capacity.
Where trustee discretion is to be exercised, the recent Marsella decisions (Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65 and Wareham v Marsella [2020] VSCA 95) reinforce that discretion must be exercised by the trustee in good faith and not for an improper purpose. Practically, this means that the trustee must:
- Seek specialist legal advice and be separately represented;
- Familiarise themselves with the terms of the SMSF trust deed;
- Consider all beneficiaries and take active steps to inform themselves of relevant matters by making enquiries; and
- Carefully consider issues of conflict, in particular where the individual exercising discretion (as trustee or as a director of a corporate trustee) is also a beneficiary in their own right able to receive benefits and/or the executor or administrator of the estate.
Importantly, the Court will not enquire into the fairness or reasonableness of an outcome if it can be shown that the trustee properly exercised its discretion in good faith.
In an increasingly litigious environment, a failure to properly consider these issues could risk the trustee being removed and the trustee’s decision being set aside by the Court, as we saw in the Marsella decisions. Of course, an improper exercise of power could have significant financial consequences for the trustee, if they are found to have acted in bad faith.
Conflict issues
As seen in cases such as McIntosh v McIntosh [2014] QSC 99 and Brine v Carter [2015] SASC 205, one issue which arises is where the deceased’s administrator or executor is also a beneficiary in their own personal capacity, able to receive the deceased’s superannuation benefits. The administrator’s or executor’s fiduciary obligations to estate beneficiaries must prevail over their own personal interests. Timing and separate legal representation need to be carefully navigated if the administrator or executor wishes to call for the death benefits in their personal right.
Practical take away points
Obviously, prevention is far better and cheaper than a cure if superannuation is properly addressed at the estate and succession planning stage. In particular, when dealing with death benefits, read the SMSF deed and consider:
- To whom entitlements may be paid on death – and what are the tax consequences; and
- Whether a member is able to make binding death benefit nominations and if so, whether the deed requires any procedures to be followed to make such nominations.
On death, where an SMSF is involved, it is critical that death benefit payments are addressed by:
- Firstly, reviewing the terms of the trust deed and any binding nomination the deceased made prior to death;
- Secondly, considering issues of conflict particularly where an executor or administrator is also a beneficiary who can receive death benefits in the absence of a binding nomination; and
- Thirdly, paying out the death benefits as soon as practicable, in accordance with the binding nomination if valid, or otherwise by properly exercising trustee discretion.
Where trustee discretion is to be exercised, the trustee must remember its fiduciary obligations to all potential beneficiaries under the terms of trust as highlighted in the Marsella decisions.
Nathan Yii works with accountants, financial planners and other lawyers to achieve their clients structuring and estate planning objectives, factoring in taxation, asset protection, SMSF compliance and dispute prevention. He consults to family businesses and family offices of high net worth individuals around Australia. Nathan also acts for clients in trusts, estates and SMSF dispute matters in the hope of resolving matters in a tax effective manner as he is a Chartered Tax Advisor. He is an adjunct lecturer and advisory committee board member for the Estate Planning Practice Specialisation in the Master of Laws program at the College of Law. Connect with Nathan via email or LinkedIn 
Disclaimer:
Current as at February 2021.
This article is prepared for training, educational and general information purposes only. It should not be relied on as (or in substitution for) legal, accounting, financial or other professional advice. Neither Nathan Yii nor Nathan Yii Lawyers Pty Ltd accepts any responsibilities for errors or omissions contained in the information provided.
Copyright of this article and publication is owned by Nathan Yii.
