A significant proportion of the wealth of people today is held in the superannuation environment and it is not uncommon for superannuation to be an individual’s most valuable asset. Whilst there is clearly a substantial amount of wealth in the superannuation environment there is, unfortunately, a significant lack of planning and understanding by many members (and some advisors) in relation to what happens to superannuation upon death and who can be nominated as a beneficiary.
Beneficiary nominations for superannuation are relatively new in the context of succession planning and the law in this area continues to evolve. There are many things that can go wrong which may potentially invalidate a beneficiary nomination, with one of the most common being the nomination of a beneficiary who cannot benefit under superannuation law.
We are currently dealing with a matter that involves a financial planner who is facing legal action after giving incorrect advice to a member on the completion of a binding death nomination for the member’s superannuation death benefits. The result of the incorrectly completed nomination is that the deceased member’s intended beneficiary has missed out on the superannuation payment and is now facing an expensive legal action to recover the funds that were intended for them, and the financial planner is facing a negligence suit.
Unfortunately, the incorrect completion of beneficiary nominations is all too common, often with devastating financial impact, but it is one that can be avoided with the appropriate legal advice.
How is Superannuation distributed upon the death of a member?
Superannuation is no longer a new concept to many Australians, however, there are still misconceptions about what happens to your superannuation after death. The most common misunderstandings we see is the assumption that:-
- Superannuation is automatically included in the Will;
- You can nominate any beneficiary directly with your superannuation fund to receive your benefits.
Unfortunately, both assumptions are incorrect and can lead to costly errors.
The treatment of superannuation upon a member’s death is not the same as the treatment of other assets. Technically, you do not own your superannuation balance until it is paid out to you. In the meantime, it is held by the superannuation fund upon trust for the members. What happens to a member’s account when they die will depend upon the terms of the trust deed governing the superannuation fund, the superannuation law, and the terms of any binding or non-binding beneficiary nomination that has been made with the superannuation fund.
This means that a member’s superannuation entitlements may not be treated in the same way as directions given in their Will, and they should consider giving directions to the superannuation fund as to how they want their superannuation entitlements paid in the event of death.
Who can be a beneficiary of the superannuation death benefits?
For a beneficiary nomination to be valid one of the requirements under the superannuation law is that the person(s) mentioned in the nomination must either be:
- The member’s ‘legal personal representative’– Legal personal representative in this context is defined to mean the executor of the Will or administrator of the estate of a deceased person. Where the legal personal representative is nominated the superannuation benefits would be under the terms of the member’s Will; or
- The member’s ‘dependant’ – Dependant in this context is defined to mean:-
- the spouse of the person: Spouse is given a wide definition that includes de facto and same sex relationships, registered or otherwise.
- any child of the person: Child is also given a wide definition and includes an adopted child, a stepchild or an ex-nuptial child of the person, a child of the person’s spouse, and someone who is a child of the person within the meaning of the Family Law Act 1975.
- any person with whom the person has an interdependency relationship: Interdependency relationship is defined as a close personal relationship of people who live together, where one or each of them provides the other financial support and one or each of them provides the other with domestic support and personal care.
Clearly the superannuation definition of dependant has restrictions on who can benefit. If a nomination is to a person who does not satisfy the legislative definition it will be deemed invalid and it will be up to the trustee of the superannuation fund to determine where to pay the member’s benefits.
Do you need legal advice for a Superannuation Beneficiary Nomination?
It is important to seek legal advice from a qualified solicitor suitably experienced in estate planning, to provide guidance on the making of a beneficiary nomination. It is also important that the solicitor is in contact with the member’s financial advisor and accountant so that the member is provided with the necessary advice to make an informed decision on the structure of the nomination.
Not only is it important to obtain advice on who can receive the member’s benefits, but also advise regarding who should receive the benefits.
Choosing the appropriate beneficiaries is important. An ill-considered choice can give rise to potentially avoidable problems. Beneficiary nominations are often made as part of the framework of the member’s estate planning needs and are usually considered in the circumstances of:-
- A desire to ensure the most tax effective structure for succession;
- Protection of the superannuation proceeds for the intended beneficiaries;
- The potential for a claim to be made on the member’s estate
- A way to make provision for beneficiaries who are not ‘dependants’ under superannuation law.
If legal advice is overlooked there may be a devastating financial impact resulting in the superannuation death benefits not ending up with the intended beneficiary.
Can a financial planner or accountant be sued for incorrectly advising on a nomination?
There is an argument that the preparation of a beneficiary nomination (usually in the form of a binding nomination) involves the provision of legal services. While advisors may claim that they are not providing legal services (a moot point considering the legal nature of the nomination), ultimately the adviser faces the risk of a damages claim by the client if a legal challenge arises. We are seeing an increase in such disputes arising, particularly in relation to beneficiary nominations and death benefit disputes.
Recently, a client attended our firm having been the nominated beneficiary under a ‘non-lapsing binding’ death nomination as an ‘interdependent’. This nomination was completed by the deceased’s financial planner who provided the deceased advice on the nomination. Unfortunately for the deceased and the intended beneficiary, that beneficiary did not qualify with the legislative definition of ‘interdependent’. It was very clear on the facts of this case that at no time was the proposed beneficiary ever a person who would fall into the category of ‘interdependent’. The nomination was declared invalid and the death benefits paid elsewhere. This meant our client did not receive the benefit, as the deceased intended, and will now be pursuing an action for damages in negligence.
How can Attwood Marshall Lawyers help?
Accountants, financial planners and other professionals must exercise due diligence when tasked with the service of providing advice on superannuation beneficiary nominations. Professionals must ensure they do not provide quasi-legal advice without the qualifications and experience to do so. A qualified legal professional can provide sound and reliable legal advice to the clients of financial planners and accountants, ensuring members receive an all-round exceptional service. Attwood Marshall Lawyers is a leading Estate Planning law firm, with one of the largest and most experienced teams in South East Queensland.