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.