SMSFs have continued to grow in number despite, or perhaps because of, the global financial crisis. People establishing these funds want to take control of their finances and would like that control to extend to who receives the money left behind after they die.
The ability to nominate beneficiaries for superannuation is restricted by the Superannuation Industry (Supervision) Act 1993 (SIS Act) and related legislation and regulations. Many people may not be aware that they cannot validly nominate a friend, a charity or any person who is not a ‘dependant’, or their estate, to receive their superannuation.
Conflicts over inherited superannuation
In our experience, superannuation is increasingly becoming an asset that attracts the attention of disappointed people who expected to be beneficiaries of a substantial member balance.
Such people are dismayed to discover that they may not have been treated the same as their siblings by a parent or, more annoyingly, by a third party professional super fund trustee when it comes to dividing up the super balance of a deceased SMSF member. Often, one of deceased’s children, as the executor, steps into the shoes of the SMSF trustee. The bad news for other siblings is that, if there is no valid binding nomination in place, then unless a will directs that adjustment be made for superannuation payments, executors can pay the super to themselves with impunity.
Some will be outraged by this, but the law is fairly settled in this area. Freedom of testation in Australia has for more than a century been restricted by legislation that allows a broad range of people to challenge a will. Ignoring the reality of potential claims can put the person managing an estate under terrible stress and financial pressure as they are liable to be sued by disappointed parties.
The only way to have certainty with superannuation is to ensure that binding nominations are in place and up to date; they usually lapse every three years.
Regulation 6.17A of the SIS Regulations sets out in detail the requirements that must be included in the notice for non-SMSFs, including the fact that this must be in writing and signed and dated by the member in the presence of two independent adult witnesses. Wills and estate lawyers are continually amazed by how many unwitnessed or undated nominations they see. People assume their wishes are clear, but often they are invalid.
SMSFs provide flexibility and certainty, but trustees should realise that SMSFs come with added responsibilities compared with other types of superannuation. In fact, the terms ‘self-managed’ and ‘DIY’ are disingenuous. Professional support is usually essential.
While nominations need to be updated in writing every three years, there are also good tax reasons for checking them annually. For instance, if a nominated child beneficiary turns 18 and is no longer financially dependent, 16.5% tax will apply to any taxable benefit they receive.
Who makes the determination?
If there is no binding nomination that is valid, then the trustees of super funds make the beneficiary determination. However they need to follow due process. When we see disputes, allegations are often made around the trustees making a determination without following due process, in terms of notices, quorums for meetings, analysis of reasons given, resolutions, etc.
We are seeing instances of trustees of public offer funds paying super out to legal personal representatives of estates that may be the subject of a legal challenge, or to de facto spouses where it seems clear that these relationships had ended before the time of death of the members concerned. Decisions in such situations can be surprising and disappointing, depending on your position.
In most cases, particularly if there is a dispute about who should apply to be the legal personal representative (that is, a spouse versus a de facto spouse, or one child of the deceased versus another), it would be prudent to be clear who the legal personal representative is. Some cases show that there has been confusion as to whether a death benefit is paid to a person in their capacity as legal personal representative or in a personal capacity.
What is a valid binding death benefit nomination?
People find the tax environment of SMSFs attractive. However, they are less excited by the fact that there are a limited number of people to whom they can pay their superannuation on their death. In particular, it is usual for them to arrange to pay a pension or a lump sum to a spouse but, just as commonly, they may want to impose controls over that spouse’s use of the money, with a view to it being available for their children when their spouse passes away. Superannuation is an excellent asset accumulation vehicle but it is not necessarily a ready asset transfer vehicle.
Regulation 6.22 of SIS Regulations 1994 states that benefits must be paid to either or both of the following:
(a) the member’s legal personal representative, or
(b) one or more of the member’s dependants.
Regulation 6.17A sets out all of the requirements for paying out benefits on or after the death of a member. Cases reveal that compliance is mandatory and strictly monitored. Technical breaches will not be smoothed over and nominations with such breaches will be invalid.
Common errors with the nomination are that they are undated, the member has signed their date of birth as the date at the time of signing, or witnesses have not signed at the same time, or at all. We also see a number of trust deeds that predate 1999 and they do not allow for binding nominations. This means that nominations are not possible in that fund.
Adult children rarely satisfy the dependancy rules. Accordingly, a rule of thumb when preparing binding nominations may be that proposed beneficiaries need to be under 15 years of age where there is the usual three year nomination period, as if they are over 15 years, it is possible that they would become a non-dependant (that is, already over 18) at the time of death while the nomination is still valid.
Don’t leave your estate in confusion
Judicial authorities are demanding strict compliance with the regulations. If they are not followed correctly in the first instance, there is usually no opportunity to ‘fix’ any problems that may arise. Superannuation nominations are quasi-legal documents but are often not drawn up by lawyers, or executed in front them. We suggest that a senior adviser supervise every step of a nomination from consideration of the different ways to protect beneficiaries to the execution of a document that is designed to achieve the important task of distributing deceased members’ superannuation wealth in accordance with their wishes. Beneficiary nomination for superannuation is a mine field that can be traversed safely and profitably.
Donal Griffin is a Principal Of Legacy Law, a legal firm specialising in protecting family assets.