Courts are taking a stricter approach to the growing number of inheritance disputes over assets held in self-managed super funds (SMSF’s), creating new issues for Will-makers, trustees, and beneficiaries. Attwood Marshall Lawyers Wills and Estates Senior Associate Hayley Condon explains how superannuation benefits are dealt with upon death and how people can minimise issues for their intended beneficiaries.
Growing risks in trustee discretion and conflicts of interest are continuously seen for SMSF’s and estate dispute trends, as advisers need to become increasingly wary of changing litigation risks to protect assets held in Super and estate planning generally. People’s assets and wealth are increasingly being held in SMSF’s to take advantage of the favourable tax concessions and relative safety from an asset protection perspective.
While this trend greatly benefits the beneficiaries in the SMSF while they are alive, things get a little more complex when someone dies.
It is usually the surviving spouse or partner who is the trustee of the SMSF or a director of the trustee company that acts as trustee. The terms of the Will do not necessarily bind the surviving trustee. This is where the bone of contention lies, with some surviving trustees electing to pay the SMSF assets to themselves or members of their own family, despite the deceased’s wishes to do otherwise.
Trustee discretion and conflicts of interest are two focus areas that have been growing from a litigation perspective, with the superannuation industry still having a fair way to go to make sure it can deal with these issues properly. The number of inheritance disputes is expected to continue rising as the $730 billion-plus in an estimated 593,000 self-managed super funds grows.
A stricter approach taken by the Courts
Family disputes over Wills and Estates have soared due to the rise in “blended families” as couples dissolve relationships (resulting from separation, divorce, or death) and form new families.
It is clear courts are taking a stricter approach to the increasing number of disputes occurring over the inheritance of assets in SMSFs, creating new issues for beneficiaries, trustees, and Will-makers.
This was recently shown in the case of Wareham v Marsella  VSCA 92 where, after the death of Mrs Helen Freeth Swanson, a dispute arose about the payment of her superannuation death benefit.
Mrs Swanson’s superannuation trust deed had given the trustees, that being Mrs Swanson’s daughter Mrs Wareham and her daughter’s husband, the discretion as to which of her dependants should receive the benefit. Mrs Wareham is Mrs Swanson’s daughter from a previous marriage.
The party bringing the dispute against the trustees was Mr Marsella, Ms Swanson’s husband of 32 years, who is also the executor of her estate.
Mrs Swanson also had a son, Charles Swanson, from the same previous marriage.
As the surviving trustee, Mrs Wareham appointed her husband as a second trustee, and they decided to pay the death benefit to Mrs Wareham in its entirety.
As a result, Mr Marsella commenced a proceeding seeking orders removing Mrs Wareham and her husband as trustees of the fund. He also requested a replacement trustee be appointed and sought an injunction restraining any further distribution of the assets and an order requiring Mr and Mrs Wareham to repay any sum already distributed.
The application was upheld on the basis that Mr and Mrs Wareham exercised their discretion as trustees without giving real and genuine consideration to the interests of the dependants of the fund.
The judge held that the trustees should be removed and made orders for filing of submissions as to the identity of a replacement trustee.
This is just one example of how the courts are tightening the discretion given to trustees to distribute scheme assets following the death of another member. This serves as a prudent reminder that trustees must understand and interpret the trust deed correctly and demonstrate they have exercised genuine consideration when deciding how to distribute assets. Failing to do so could potentially mean their decision will be set aside, and in extreme circumstances, they could be removed from their position as trustees and ordered to pay back any funds that have been distributed.
What is an SMSF?
A self-managed superannuation fund (SMSF) is a superannuation trust structure that benefits its members upon retirement. The main difference between SMSFs and other superannuation funds is that SMSFs are private funds where the members are also the fund’s trustees. SMSFs must have one member and a maximum of four members, and one of the main advantages is the level of control the trustees have when tailoring the fund to meet their individual needs.
In June 2021, ATO figures indicated that there were 597,900 self-managed superannuation funds in Australia. Although COVID-19 caused a brief dip in SMSF funds in early 2020, the sector has shown steady growth ever since.
There can be problems having a fund with several members from a practical perspective. Each member may have differing investment goals and operating an inter-generational fund with different goals can be difficult.
The reality of such an arrangement is that if there are disputes within the family, the fund may need to be concluded, triggering a division of the fund assets or a forced sale from which cost and taxation implications may arise.
There are distinct advantages to proper estate planning when a self-managed superannuation fund is available. The main advantage is that if you plan well, your money is distributed in the way you desire after your death, and who you want to benefit from the assets, ultimately will.
How is an SMSF dealt with upon death?
When a self-managed superannuation fund member dies, a death benefit payment is generally made to their dependant, another beneficiary, or their legal personal representative. The death benefit payment is made as soon as practicable. The payment can be made as either a lump sum or income stream if the beneficiary is a dependent. If the beneficiary is not a dependent, the benefit must be paid as a single lump-sum payment. The ATO will generally allow up to six months for the payment to be made. If it takes longer than six months, then the SMSF trustee may be required to explain the reason for the hold up. The tax office may accept reasons such as the death benefit nomination being disputed by beneficiaries or the uncertainty of eligible beneficiaries. But if the Trustee is seen to have taken unreasonable time to pay out the death benefit without appropriate reason, then the tax office may take compliance action against the SMSF.
As superannuation does not automatically form part of your estate, it is essential to ensure you have all the documents in place, including a valid Will and death benefit nomination, to ensure this asset is dealt with accordingly.
The type of death benefit nomination or instructions that you provide to the Trustee of your SMSF will depend on your circumstances.
Subject to the governing rules of your superannuation fund, a superannuation death benefit can usually be paid to:
- Member dependants – spouse, children, or financially dependent individuals
- Member’s legal representative to form part of their estate.
When the death benefit is paid to the LPR, there is no restriction on who can receive the death benefit under the Will terms. However, there are tax implications concerning the death benefit that you may wish to consider.
Trustee discretion and conflicts of interest
When there is no valid death benefit nomination, a trustee can exercise their discretion under the fund’s governing rules regarding the payment of the death benefits to beneficiaries. Resulting from this discretion, conflicts may arise where the Trustee falls within the category of an eligible beneficiary.
In exercising discretion in good faith, the Trustee should:
- determine all eligible beneficiaries of the deceased, their relationship to the deceased, and their financial situation.
- Understand the deceased member’s wishes detailed in their Will or any non-binding nomination.
- Seek specialist advice from an experienced Wills and Estates lawyer relating to the payment of death benefits, particularly where the Trustee is also a beneficiary of the deceased.
It is essential to ensure all potential beneficiaries are identified by the Trustee and considered in relation to the decision of payment of the death benefit and ensure that:
- Documentation is put in place that details the Trustee’s decision-making process to exercise their discretionary powers. This will assist in demonstrating that a trustee has made all reasonable inquiries of potential beneficiaries and their circumstances to give factual and genuine deliberation in their decision to pay a death benefit.
- Adequate documentation should be completed on a case-by-case basis – caution should be given to using a Pro-forma template to document these decisions. This could create problems in establishing genuine consideration given by the Trustee. In these cases, there is potential for a challenge to the Trustee’s decision. However, if appropriate documentary evidence is in place, it will support that the Trustee has acted per their responsibilities as Trustee of the fund. It is essential to note from the Marsella case that a trustee is not obligated to justify their decision.
Potential conflicts of interest that can arise re-affirm the importance of obtaining specialist advice and implementing proper estate planning, including completing a valid, binding death benefit nomination if this suits your specific circumstances to protect your assets and your beneficiaries.
Estate planning and binding death benefit nominations
Estate planning is about ensuring that an SMSF member has legal arrangements in place that will ensure their wishes come to fruition in the event of their death. This involves the coordination of arrangements that consider their home, other assets, business assets, life insurance, and self-managed super fund.
We set out five things everyone should know about Binding Death Benefit Nominations.
1. Not everyone can be nominated
There are specifics relating to who you can name in a Binding Death Benefit Nomination, you cannot just name anybody. A Binding Death Benefit Nomination can only be made in favour of your legal personal representative (i.e. your estate) or your dependants (i.e. your spouse, your children, or someone who has an interdependency relationship with you).
Concerning superannuation, an ‘interdependency relationship’ refers to two people who have a close personal relationship and live together. One or both provide financial and domestic support and personal care for the other.
2. Binding nominations may expire
Binding Death Benefit Nominations expire every three years; however, some superannuation funds have an option for a non-lapsing binding nomination. This means they do not expire and remain in place until they are rescinded. You are free to rescind or change your lapsing or non-lapsing binding nomination at any time.
3. Binding nominations need to be prepared carefully
For a Binding Death Benefit Nomination to be valid and ensure that your wishes are carried out, they must be carefully prepared. Generally, each beneficiary must be an eligible beneficiary as set out above. The total of the allocations for each beneficiary must add up to 100%, and the document must be appropriately witnessed.
Two people must witness binding Death Benefit Nominations over 18 years of age, and the witnesses must not be named in the nomination. If you nominate your legal personal representative, it is recommended that the witnesses not be anyone named in your Will.
Additionally, where a Binding Death Benefit Nomination is made for an account with an SMSF, it is essential to precisely follow the terms of the SMSF’s governing rules to ensure its validity.
4. Binding nominations must be sent to the Trustee
Generally, a Binding Death Benefit Nomination must be given to the Trustee to be effective. Unlike a Will, you cannot simply make a Binding Death Benefit Nomination and put it in your filing cabinet and forget about it. The Trustee must be aware of the Binding Death Benefit Nomination to be bound by it.
5. Binding nominations do not just affect your superannuation
Superannuation often includes more than just the contributions made by your employer or you over your lifetime. A life insurance policy held within a superannuation fund will be paid to the fund’s Trustee. It will form part of the superannuation death benefit before paying the beneficiary. In this case, the Binding Death Benefit Nomination will also apply to how those insurance proceeds are paid.
As payment of superannuation entitlements following your death can result in significant distributions to your beneficiaries, you should consider a Binding Death Benefit Nomination when preparing your estate plan. This will ensure your wishes are carried out and you deal with these valuable assets appropriately.
Attwood Marshall Lawyers – helping you preserve your wishes and plan for the future
Binding Death benefit nominations can be an essential tool in succession planning; however, if these documents are not adequately prepared, they can cause serious problems. Our experienced estate planning lawyers can help you understand what documents you need to put in place to ensure your wishes can be fulfilled and if your circumstances require a binding death benefit nomination.
If you have an SMSF, it is imperative that you properly take this into account with your estate planning and making your Will. Usually, your Will won’t cover SMSF assets, and it is vital to factor these issues into your planning.
Attwood Marshall Lawyers have one of the largest Wills and Estates team of lawyers in Australia who practise exclusively in this specialised and complex area of law. Your estate planning documents will be prepared by an experienced lawyer who will take a holistic approach to ensure your estate planning needs are met.
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