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.
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.
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.
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:
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:
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.
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.
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:
On death, where an SMSF is involved, it is critical that death benefit payments are addressed by:
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.
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