Estate Planning,Confessions of an Estate Planner

Superannuation Litigation: Confessions of an Estate Planner

Superannuation Death Benefits

With many people holding a sizeable part of their retirement savings (and investments) in Superannuation, and given the increasing number of cases in the courts where Superannuation Death Benefits are in dispute, I thought it would be best to devote Part IV to this ever growing area of practice. What may seem very simple, simply isn’t that simple given the variety of factors that come into play. All you need is someone sufficiently motivated to put everything to the test.

Every family situation is different. Every Super Fund is different. And, there is not, as some may have you believe, a ‘one size fits all’ strategy. There are as many strategies for just as many varying scenarios and no one issue is complex (but putting it all together can be).

And if you think that your Will covers your Super think again. Absent a properly made Binding Nomination, the payment of Death Benefits from a Super Fund is almost always in the discretion of the Trustee of the Fund (so it does not matter what your Will says).

The Questions

Here are some questions you should ask yourself (and provide the answers to your advisor):-

Do you want flexibility or do you want to lock things down forever?
Do you have an SMSF or are you a member of a Retail/Industry or Public Sector Fund?
Does your Fund Trust Deed provide that the payment of a Death Benefit is in the absolute discretion of the Trustee? (don’t be surprised here – most do);
Will your spouse/former spouse/defacto spouse/children/step children/children of your defacto spouse be happy or unhappy with what you have done (or haven’t done)?
How does this fit in with the Will you prepared 10 years ago when your account balance was not as big as it is now?
Is there potential for a claim to be made that the person making the decision about a Death Benefit has a conflict of interest (i.e. they are also the executor of your estate and bound to pay it to the estate)?
What does your last Death Benefit Nomination say? Is it consistent with your Will? Is it consistent with the pension your accountant got you to set up? Are the nominated beneficiaries legally able to be paid a Death Benefit?
What is the tax treatment of whatever it is you have done (or not done)?

The reassuring thing is that most people lead such uncomplicated lives that by and large none of this will ever concern them or affect their loved ones greatly. In saying this, the seeds of most bitterly fought Superannuation disputes are sowed years before during the development of a blended family (commonly the biological children of the deceased at war with the most recent spouse of the deceased).

There are also often disputes about whether or not someone is a spouse or not.

There is layer upon layer of regulation (and recent superior court decisions about the conflicts facing estate executors who are also Superannuation Fund Trustees) to make it a lawyer’s paradise. I think you will agree that this is a fantastically ripe environment for litigation/mediation/court hearing processes (not to mention angst, stress and all of their companions) to be generated.

Not the best experience for your loved ones and something that can in the majority of cases be avoided.

Flexibility - Not Locking It In

Flexibility is King. Strength is Queen. Or so the weightlifters say.

Flexibility at the time of payment in possibly 10 to 20 years’ time may be completely desirable due to inevitably changed circumstances. For instance your beneficiaries could be:-

facing bankruptcy (or have multiple creditors);
involved in proceedings in the Family Court;
in a relationship with a gold digger;
in rehab (for alcohol, drug and/or gambling addictions);
no longer under 18 (making the Death Benefit Taxable in their hands);
not legally capable (i.e. they are suffering from dementia);
experiencing different financial/life circumstances (where one may not need any help and another may certainly need it).

If you have locked in the Death Benefit payment properly (there are a variety of ways as to which, see below) and if your loved one is facing any one of these scenarios it is likely they will never see the Death Benefit (i.e. it or certainly a chunk of it will go to others).

If flexibility is the choice for you then you must ensure that whoever controls the payment of your Death Benefit will make a decision that you wanted and that your loved ones will be happy with it.

Making sure the right person is in control of the decision making process is fundamental in every scenario (i.e. even if you think you have locked everything in) and this is dealt with below.

No Flexibility – Locking It In

Whilst the flexibility route is the most desirable in most cases, sometimes it’s just not an option.

People generally lock in the Death Benefit payment in the following scenarios:-

they have a blended family (i.e. the Brady Bunch family);
there will undoubtedly and inevitably be a dispute between the survivors;
they are in a retail/industry/public sector Fund and do not want the decision to pay the Death Benefit to be left to a stranger (i.e. the board of Trustees of their Super Fund in Sydney or Melbourne who are reviewing many cases at a time and having no real interest in the outcome);
they are in a retail/industry/public sector Fund and do not want the decision to pay the Death Benefit challenged in the Superannuation Complaints Tribunal (which can take many many years as it has a huge (unlikely to be cleared) back log);
the intended beneficiaries do not have capacity and will be in control of an SMSF (i.e. they are minors or they do not have mental capacity);
the intended beneficiaries have capacity and will be in control of an SMSF (but will all most definitely make the wrong decision).

You can lock in your Death Benefit in a variety of ways (depending on your Fund rules) including having or using:-

a quality (and in some cases tailored) SMSF Trust Deed;
a quality corporate Trustee Constitution;
a properly prepared and considered Binding Death Benefit Nomination (that is consistent with your Will and Enduring Power of Attorney, Trust Deed and made in compliance with Superannuation law);
a Reversionary Pension or an Auto Reversionary Pension; or
separate SMSFs;

It is also essential that what you have done is regularly reviewed.

You can also direct that your Death Benefit can be paid:-

as a lump sum to your beneficiaries or your estate;
as a pension to certain beneficiaries;
any combination of the above.

Control

If flexibility is the preferred route then having your Super in an SMSF (as opposed to a retail/industry/public sector Fund) can allow you a degree of control in that you get to decide who will make the decision to pay the Death Benefit. This may seem simple enough but as you may suspect there are some issues to carefully consider.

Under Superannuation law members of an SMSF must also be a Trustee (or Director of a Corporate Trustee). At the moment if the member dies or loses capacity the control of the SMSF changes. On Death the Legal Personal Representative (LPR) (i.e. an executor) of a member can represent the deceased member as a Trustee/Director until the Death Benefits commence to be payable. On incapacity, an Attorney under an Enduring Power of Attorney can represent the member. Note the use of the word ‘can’ here. If you have not put in place the necessary mechanisms to get your LPR into a position of control then whoever has actual control (perhaps another member) will be making the decisions.

Here are some more questions-

Do you have the complete and latest SMSF Deed and has each update to the Deed been varied properly in the past?
Have the Trustees been properly appointed in terms of the correct SMSF Deed?
Have all Deeds of variation been prepared, signed and witnessed properly?
What does the Trust Deed actually say about the passing of control?
If your Trustee is a Company what does its Constitution say about the appointment of directors (i.e. what are the voting rights attached to the shares, can directors appoint another director, can a majority of shareholders appoint a director or must it be a unanimous decision)?

The SMSF Trust Deed and how the Trustee is controlled are the foundations for all strategies. It is critical that there is succession to directors and that the company Constitution allows a shareholder’s LPR (including an Attorney under an LPR to exercise) to act.

I do not want to get too technical but I do want you to understand that simple technicalities can be used to the advantage of someone which results in them receiving your Death Benefit (something that you would never have wished for).

It happens.

I cannot emphasise this enough. What matters the most is who is in control.

The common mistakes

Here is a non-exclusive list in no particular order:-

the pension documents are inconsistent with a Binding Nomination;
the pension documents and Binding Nomination are inconsistent with the Trust Deed;
the Binding Nomination has lapsed;
the Binding Nomination has not been signed and witnessed correctly;
the Binding Nomination does not make provision (or it is not possible for it to have) cascading alternative provisions that take account of death, re-partnering, bankruptcy and all the usual things that happen in over a lifetime;
the LPR becomes the SMSF Trustee and has a discretion to exercise between dependents and the estate – they have conflict in that if the Trust Deed or Will does not allow the LPR to act in the face of the conflict it will certainly be argued by someone that they are duty bound to pay the Benefit to the estate;
the Fund rules require a certain form for a Binding Nomination to be used and it is not used or prescribed procedures are not followed to the letter;
the Fund rules require the Trustee to accept the Binding Nomination and nothing is done to perfect this;
the Fund rules require the Trustee as part of the Binding Nomination process to give the member information (which is not given);
an Attorney does not act (or acts in their own self-interest) to confirm a lapsed Binding Nomination.

If you are interested in finding out more about how to prepare a Binding Nomination to reduce the risk of it all going awry there are some tips on how to prepare one at this link to our website.

Part V of the Confessions will deal with Estate Litigation.

Read previous Confessions of an Estate Planner articles below:

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