Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 335

SMSFs the new battleground in family disputes

SMSFs are often the forgotten part of the succession-planning puzzle and are becoming a battleground for family disputes in Australia. SMSFs often hold the greatest pool of assets for the people in question. 

We see cases where there has been little thought on key issues such as succession of control or passing of death benefits. These have the potential to snowball into major problems, as demonstrated by several recent court cases. 

Many believe their affairs can be dealt with simply via a standard Death Benefit Nomination (DBN). These are easy to prepare, and while they work well in ‘happy family’ scenarios, they may not offer adequate protection when contested.

There are two main issues which have the most potential to create family disputes over an SMSF:

1. SMSF control

SMSF control is exercised by the fund’s trustee(s), as appointed under the terms of the trust deed. But who is best to sit in this position?

A corporate trustee can make succession a smoother transition, provide a clear separation of assets, and give greater protection for directors and shareholders when compared to an individual acting as trustee. The corporate trustee should only act as trustee for the SMSF, to avoid confusion.

It is dangerous to assume a member’s legal personal representative will take control of the SMSF, as superannuation law does not automatically require a legal personal representative to become a trustee in place of the deceased person.

Ensuring control passes with the intended beneficiary (where possible) is key. When using a corporate trustee, this means leaving the shares in the trustee company directly to the intended beneficiary, under the member’s will.

This alleviates the intended beneficiary from having to handle complications, which may arise with a third-party trustee or, in some cases, no trustee at all.

2. Superannuation death benefit nomination

Many SMSFs are comfortable to permit the trustee, which is often the surviving spouse or partner, to decide where the super will be paid. In this case, a non-binding nomination is usually the best option.

When might a binding nomination be more appropriate? First, some questions:

  • Are there children from an earlier or later relationship, which the SMSF wishes to give super?
  • Do you want to give your super to a surviving partner or child, which might become problematic if the gift is made through your Will?
  • Is the estate likely to be subject to a claim or litigation after death?
  • Is there any chance that a trustee might not abide by your wishes?

If it’s YES to any of these questions, a Binding Death Benefit Nomination (BDBN) may be more appropriate.

Importantly, the trust deed’s terms must be complied with if the nomination is to be legally effective and valid.

Whatever your wishes, a DBN should sit together with your will so both documents work together and account for your assets as a whole, ensuring the intended beneficiaries inherit what they are entitled to.

Consequences of not having a clear BDBN 

Let’s consider two examples of the consequences of not having a clear and technically compliant BDBN.:

1. Re Marsella: The case Re Marsella, from 2019, shows a greater willingness by the Court to intervene.

Helen Marsella was survived by her husband and two children from her first marriage, Caroline and Charles. Helen and Caroline had established an SMSF as trustees, with Helen as the sole member. When Helen died, Caroline became the sole trustee of the SMSF.

After Helen’s death, Caroline resolved as surviving trustee to pay the entire death benefit to herself, and also purported to appoint her husband as a trustee.

The Court intervened on the basis that Caroline had failed to inform herself of the relevant matters and thus had failed to actively and genuinely exercise her discretion. This situation could have been avoided if the right person was trustee, and a valid binding nomination was in place.

2. Munro v Munro: The 2015 case of Munro v Munro also shows how missing details in a BDBN’s technical requirements can bring things undone. Precision is vital, and errors may be minimised by seeking independent advice.

Munro left a will naming his daughters as his executors, and a document, prepared by his accountants, purporting to be a BDBN, and nominating the ‘Trustee of Deceased Estate’ to receive the benefits.

A binding nomination can only specify dependants or the member’s legal personal representative. This is required to fulfil Superannuation Industry (Supervision) Act 1993 (SIS) legislation purposes, and for the purposes of the trust deed. A legal personal representative for SIS purposes means the executor of the deceased person’s will (or the administrator of their deceased estate). This created a problem for Munro.

Munro’s document did not nominate either a dependant of Mr Munro or his legal personal representative, which meant it did not comply with either the terms of the trust deed or the SIS legislation. It was therefore not a binding nomination for the purposes of the trust deed. This left the trustee (his wife from his second marriage) with discretion how to pay the death benefits.

If you are in doubt as to whether an appropriate structure is in place, we recommend seeking professional advice.

Adapting to changes

The introduction of the Transfer Balance Caps (TBC) from 1 July 2017 has potential to introduce more complexity into SMSF estate planning.

SMSFs are now limited by the TBC, and members have to consider what to do with the excess. Every situation is different but may involve

  • reversionary pension nominations
  • DBNs dealing with accumulation balances
  • benefits passing to an estate or an individual
  • testamentary trusts and superannuation proceeds testamentary trusts
  • life interest pensions, and
  • child pensions.

These options need to consider the family dynamic, including concerns about estate litigation and the ability of beneficiaries to manage their affairs. In some cases, the best strategy is one that does not provide the best tax outcome.

The key message for avoiding family disputes over an SMSF is to remember it’s not as simple as having a death benefit nomination.

 

William Moore is a Partner and Sam Baring a Senior Associate at Hall & Wilcox Private Clients. This article contains general information only and does not consider the reader’s individual circumstances.

 

RELATED ARTICLES

Three areas SMSFs should consider outsourcing

SMSFs and the control over estate planning

Minister Jane Hume on SMSFs and superannuation reform

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require trustees - even SMSFs - to offer a retirement income product to protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.