Limits to a will’s power over an SMSF

Share

“Nominated de facto gets super over the deceased’s natural children”.

We’ve seen that headline before. It highlights the importance of establishing which assets are part of an estate and which are controlled by a super fund upon death. A will cannot direct the trustee of a super fund how the super should be paid upon death.

A recent case involved the tragic passing of a 40-year-old father of two young daughters. At the time of his passing, he was in a relatively new de facto relationship with a woman who was not the natural parent of the two girls. His will left his estate, including his superannuation, to his daughters. However, his de facto lodged a claim that she was his ‘partner’ and received the majority of his superannuation benefits. In fact, out of the $451,498 total superannuation death benefit, his daughters received only $49,664 each, with $352,170 going to his de facto.

Watch the limits of the will to direct super

There are similarities between this case and Katz v Grossman which was decided over 10 years ago, in 2005. Mr Katz was the sole member of his SMSF and one of two individual trustees, the other being his wife. On the death of his wife, his daughter, Mrs Grossman, was appointed as second trustee. Mr Katz’s will left his entire estate, including his superannuation entitlements of about $1 million, to his two adult children, daughter and son, on a 50/50 split.

On the death of the father, the sole remaining trustee, Mrs Grossman, appointed her husband as the second trustee and they chose not to follow Mr Katz’s wishes in his will, but instead paid the entire superannuation death benefit to Mrs Grossman. That is, the daughter received 100% of the father’s death benefit and his son received nothing.

Whilst these cases are some 12 years apart, they highlight the importance of the assets under the authority of a will and those in a superannuation benefit. A will cannot direct the trustee of a superannuation fund in relation to the payment of a benefit from the fund upon death. An indication of how superannuation should be treated in a will can act as a form of non-binding death benefit nomination, which is merely a wish on the direction of the death benefit and nothing more. The provisions of the trust deed of the superannuation fund take precedence over any instructions given in a will.

Binding death benefit nominations

A validly-completed binding death benefit nomination (BDBN) will bind the trustee of a superannuation fund to the payment of a member’s superannuation entitlement upon death. However, ensure that the BDBN has been correctly completed and that the nominated dependant(s) are also valid. Generally, a superannuation dependant is a spouse, child (of any age) or the Executor of the deceased’s estate. There are also some other categories, such as ‘financial dependant’ and an ‘interdependent’. Further, don’t confuse a superannuation dependant with a tax dependant – that’s for another article.

However, a BDBN is not the ‘be all and end all’ of estate planning for superannuation.

Another relevant case, particularly for SMSFs, is that of Wooster v Morris in 2013. That case involved a two member-SMSF. The husband provided to the trustee a BDBN, nominating his two daughters from a previous marriage as his dependants to receive his superannuation benefits upon his death. He died and his second wife (not the natural parent of the two daughters), together with her son (not the deceased’s son) decided to disregard the BDBN and effectively pay the death benefit to herself. Some years later, the court affirmed the BDBN as valid, however, legal fees mounted and the second wife died, leaving her own estate bankrupted.

In the end, the eventual payment to the daughter is well short of what they would have received had the BDBN been accepted in the first instance.

It’s all about control

Remember that saying ‘possession is nine-tenths of the law’? Well, when it comes to death benefits paid from an SMSF, who controls the fund on death can be everything. If the father in the Wooster case did not want his second wife to receive any of his superannuation on death, maybe he should have considered not having her as party of the fund, either as trustee or member/trustee. A well-constructed BDBN can help provide sound succession planning and inter-generational wealth transfer. However, when it involves an SMSF, knowing who is in control of the SMSF at the time of death is paramount.

Time for a review of your estate plan

Whilst the thought of our demise is not one we wish to dwell on, it is important that we have in place our estate plan. This plan is not simply a will, but starts with the overall view of what we want to happen to our assets in the event of our death. For example, who do we want to benefit and how are they to benefit, and do we pay in a lump sum of assets or an income stream? Once we know that, we can engage professionals to arrange the relevant documents, including:

  • Will
  • BDBN
  • Enduring Power of Attorney
  • Testamentary Trust provisions in a will
  • Superannuation Proceeds Trust provisions
  • Any special provisions in an SMSF Trust Deed.

Superannuation is often the largest asset in an estate and it is important, in fact it’s our duty, to preserve it for those who we want to benefit from it (assuming we haven’t spent it all!). A will does not, on its own, provide the mechanism to ensure that the distribution of superannuation as intended actually takes place.

 

Mark Ellem is Executive Manager, SMSF Technical Services at SuperConcepts, a leading provider of innovative SMSF services, training and administration. This article is for general information only and does not consider the circumstances of any individual.

Share
Print Friendly, PDF & Email

, , , , ,

3 Responses to Limits to a will’s power over an SMSF

  1. Ashley November 2, 2017 at 11:39 AM #

    Wow that’s a scary story! Doesn’t say whether the de-facto was a binding death benefit nomination recipient in the super fund trust deed?– I guess not – makes it scarier!

  2. Roy November 5, 2017 at 9:08 AM #

    Rahul , thank you for clarifying. The crux seems to be the lack of ability to nominating a binding nomination seems to have been the only issue. Bizarre that in this day and age the military super doesn’t offer a binding option. If someone is good enough to defend our country then surely they are capable of directing their superannuation proceeds on death !

Leave a Comment:

*

Register for our free weekly newsletter

New registrations receive a free copy of our ebook, Cuffelinks Showcase 2016.