Binding, eh, maybe…

In self-managed super funds (SMSFs), control of the trustee can be paramount to the dealing with a deceased member’s benefits. In many respects, a superannuation trust fund is like any other trust fund, in that a trustee holds funds for the benefit of the members.

If the trustee has control of the fund, then the trustee may have a discretion to decide which of the eligible parties will receive part or all of the death benefit, which may or may not be in accordance with the wishes of the deceased.

The case of Katz v Grossman [2005] NSWSC 934 highlights what can happen if there is a failure to properly address the issue of succession of trustee control on the death of the member:

• Mr and Mrs K were the members and trustees of their SMSF. Mrs K died in July 1998 and probate of her will was granted to Mr K in March 2000.
• In May 1999, Mr K had appointed his daughter Mrs G as a second trustee of the SMSF.
• Mr K died in September 2003, leaving his son, D and Mrs G as his executors. Mr K had also executed a non-binding death benefit nomination that his superannuation death benefits be paid equally to D and Mrs G.
• In December 2003, Mrs G, as the continuing sole trustee sought to appoint her husband, Mr G as the second trustee of the super fund pursuant to section 6(4)(b) of the Trustee Act 1995 [NSW]. The SMSF deed contained a provision that any vacancy of the office of trustee must be filled within 90 days.
• In contradiction of Mr K’s wishes, Mr G and Mrs G, as the trustees of the SMSF, paid the whole of Mr K’s death benefit to Mrs G.
• D commenced proceedings.

The NSW Supreme Court held that as it was unlikely the vacancy in the trustee would be filled within 90 days, Mrs G was justified in using section 6 of the Trustee Act to appoint Mr G as a trustee. Consequently, the payment of the death benefit solely to Mrs G was not something that the Court could overturn.

Members of a superannuation fund can take control of the payment of death benefits so as to ensure that death benefits are paid in accordance with their wishes. However, such a decision can also remove any discretion for the trustee of the fund and imposes inflexible obligations on the death of the member. These obligations are imposed in a number of ways:

1. Lapsing Binding Death Benefit Nominations

A member of a fund can make a valid binding death benefit nomination which eliminates the trustees’ decision-making power. However, such a nomination will cease to have effect after three years and requires a further valid nomination to be made. The regulations provide certain requirements, which if not meet, invalidate the nomination, meaning the trustee becomes the decision maker without having to have regard to the testator’s wishes. This can result in superannuation death benefits being paid to a different person or persons than the testator wanted.

2. Non-Binding Death Benefit Nominations

In some superannuation funds, a member can nominate a preferred beneficiary to receive death benefits. However, such a nomination does not remove the trustee’s ability to pay the death benefits to a person that the trustee thinks is appropriate, subject always to the terms of the fund deed.

3. Non-Lapsing Binding Death Benefit Nominations

Only available for SMSFs, a Non-Lapsing Binding Death Benefit Nomination does not lapse and remains valid no matter what, providing that the fund deed permits such a nomination to be made. To put in place a Non-Lapsing Binding Death Benefit Nomination, a testator will need to specifically ensure that the deed either has, or is amended to have, this provision. There can be traps with Non-Lapsing Binding Death Benefit Nominations however, particularly if relationships change over time and the nomination is not updated.

4. Power of Attorney

Powers of Attorney can be used to ensure a testator’s wishes are carried out if they become incompetent, for example due to serious stroke or other illness. Subject to a member’s instructions, an enduring power of attorney can allow the attorney of the member to exercise the member’s wishes (such as extend a binding death benefit nomination) or take actions which may be tax effective if a member becomes incompetent (for example, to allow an attorney to draw funds out of a superannuation fund in circumstances where the attorney is aware that the death of the member is imminent).

1. Compliance with the provisions of the SIS Act and SIS Regulations:

• D v D was a Queensland case involving a letter by the deceased under which he nominated his legal personal representative to receive his superannuation as an asset of his estate, and then through his will, his second wife would receive half of his superannuation and his daughter half.
• Mr D had nominated his second wife, and daughter from his first marriage, as his executors.

The daughter from Mr D’s first marriage asserted that the letter constituted a Binding Death Benefit Nomination.  His second wife disputed the binding nature of this nomination asserting that the language in the letter did not convey a binding intention by using the word “wished’ in reference to where Mr D wanted his benefits to be paid, and that the nomination did not comply with the statutory requirements of the SIS Regulations.

The court found that the SIS Regulations required the nomination to be in writing and witnessed by two adults and contain a declaration by the two witnesses and so the letter did not comply. His second wife received the entirety of his superannuation.

2. Compliance with the provisions of the trust deed:

In M v M, the issue was whether or not a Binding Death Benefit Nomination was invalid as it did not comply with the requirements of the superannuation fund trust deed.

Mr M had established a SMSF in which he and his second wife were the members and trustees. The superannuation fund trust deed contained a requirement that a Binding Death Benefit Nomination could only nominate a member’s legal personal representative or a member’s dependents. Mr M subsequently prepared a Binding Death Benefit Nomination directing certain funds to the ‘Trustee of Deceased Estate’.

His will directed a sum to be paid to his second wife and the balance to be divided between his two daughters of his first marriage.

Following M’s death, his second wife asserted that the Binding Death Benefit Nomination did not comply with the specific requirements of the superannuation fund trust deed. His daughters sought an order that the nomination was valid.

They were disappointed with the court finding that the nomination to the ‘Trustee of Deceased Estate’ did not comply with the terms of the superannuation fund trust deed. M’s second wife received the entirety of his superannuation which was the major asset of his estate.

3. Trustee not bound to follow a direction in a deceased member’s will:

I v C was a Western Australian case that highlighted that a trustee is not bound to follow a direction in the deceased member’s will.

Mr and Mrs C had established a SMSF – they were the trustees and members. Mrs C made a Binding Death Benefit Nomination in favour of Mr C.

Five years later Mrs C made a will with two of her children as executors, which specified that her superannuation entitlements should go to her four children from a previous marriage. The next year Mrs C made another Binding Death Benefit Nomination in favour of Mr C, which expired before her death and thus Mrs C died in 2010 without a valid Binding Death Benefit Nomination.

Mr C obtained advice that he could remain as the sole trustee of the SMSF for 6 months after the death of Mrs C, which he did.  He then paid the death benefits to himself, and within the six months period installed a corporate trustee of the SMSF and resigned as trustee.

The children sought to have the transactions overturned but they were unsuccessful as the court determined the payment to Mr C to be a valid exercise of the trustee’s powers.

So…can a binding death benefit nomination actually be made?  Yes, but from these examples, it can be seen that a number of different documents need to be taken into account when an individual or a couple plan their wills and how their superannuation death benefits are going to be dealt with. To recap:

• The starting point is the terms of the superannuation fund’s deed. Non-compliance with the deed can be fatal to any testamentary wishes;
• Where there is a corporate trustee, the constitution of the company and the Corporations Act 2001;
• Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) including the SIS Regulations; and
• Ensuring that any Binding Death Benefit Nomination complies with both the SIS Act and the terms of the relevant deed.

This can be a complex, legalistic and difficult to understand area of law.  The principal objectives of most people in planning their estate are:

1. ensure the assets go to the intended beneficiaries; and
2. avoid disputes that deplete the value of the estate and set family members against each other.

SWS Lawyers have decades of expertise in the most complex asset and estate planning arrangements.  Contact our team to advise you further.