SMSF estate planning and death benefit nominations
A self-managed super fund (SMSF) is one of the key components of estate planning and it is important to consider what will happen to the funds when you or any other fund member dies.
There is a common misconception that when you die, your superannuation entitlements will automatically be dealt with by your will. However, it is important to note that when you die the distribution of your superannuation entitlements is governed by the trustee of your superannuation fund, not your will.1 Your SMSF trustee decides how the distributions are to be made, subject to the terms of the superannuation trust deed and relevant legislation. Your will document only becomes relevant if the distributions are paid to your legal estate by your SMSF trustee.
Here, I share some Australian state Supreme Court decisions that highlights risks related to SMSF estate planning and factors that shouldn’t be overlooked.
Binding death benefits
The Ioppolo v Conti case in the WA Supreme Court, involving a second marriage, highlighted the challenges involving SMSFs and estate planning. Mr & Mrs Conti were the only members and the individual trustees of an SMSF. Mrs Conti passed away in August 2010. Unfortunately, her binding death benefits notice (BDBN) had lapsed in April 2009. In the absence of a valid BDBN, the SMSF trust deed allowed the trustee of the SMSF to decide where Mrs Conti’s death benefits were to be paid. As sole remaining trustee, Mr Conti brought in a corporate trustee to run the fund that he was the sole Director of (as he was lawfully permitted to do) he then determined to pay Mrs Conti’s death benefits to himself. The SMSF laws do not cause the executor of the deceased estate of the deceased member to automatically become a trustee (or Director of the body corporate) of an SMSF. Nor are the remaining trustee(s) obliged to appoint the executor as a trustee (or Director of the body corporate).
Let us explore what in effect can happen to your superannuation entitlements when you die. This can give you a simple understanding of why you need a SMSF Will which is a non-lapsing binding death benefit nomination.
Non-binding death benefits
Some superannuation funds allow you to make a direction, called a non-binding death nomination (NDBN). The difficulty, as the name suggests, is that it is not binding on your trustee and the trustee may very well decide to ignore it.
Let’s have a look at how this impacted a family in the Katz v Grossman [NSWSC 934] case in the Supreme Court of New South Wales highlighted the shortcomings of Non-Binding Death Benefit Nominations and the importance of choosing the trustees of an SMSF carefully.
Mr and Mrs Katz were members and trustees of their SMSF. They had two children, Linda and Daniel. After Mrs. Katz’s death, Mr Katz appointed Linda as co-trustee of the fund. Prior to his death, Mr Katz made a Non-Binding Death Benefit Nomination in his Will stating that his two children, Linda and Daniel, were to receive his entitlements in the SMSF in equal shares on his death. Later, when Mr Katz died, Linda appointed her husband as co-trustee of the fund which she was legally entitled to do. Linda and her husband (as trustees of the fund) could legally decide who received Mr Katz’s superannuation entitlements. Linda and her husband resolved to pay all of Mr Katz’s superannuation (approximately $1 million) to Linda to the exclusion of her brother Daniel. Daniel took the matter to the Supreme Court. Unfortunately for him, the Court could not change what had occurred as it was in accordance with the law, and Daniel received no part of his father’s superannuation death benefits.
In simple words, choosing to rely on Non-Binding Death Benefit Nominations may not be a wise decision.
Some superannuation funds allow you to make a legally enforceable direction, called a binding death benefit nomination (BDBN). This is a written notice to the trustee of your super fund which sets out who will receive your superannuation entitlements upon your death, and what you want them to receive. The BDBN must comply with the rules of your super fund, as well as the law. It is arguable that it needs to be updated every three years in order to be valid and binding, although there is a court decision that says the three-year time frame does not apply to SMSFs. It would certainly be more prudent to follow the approach of upgrading a BDBN regularly, or at the very least regularly consider if it needs upgrading, eg. at tax time you might consider your estate affairs to see if they are still up to date.
The dangers of failing to provide a complying BDBN can be seen in the February 2009, Queensland Supreme Court case of Donovan V Donovan  QSC 26.
In this case, Mr Donovan established a superannuation fund with a corporate trustee. Mr Donovan was a member of the SMSF. Mr and Mrs Donovan (his wife by a second marriage) were also the respective Director and Secretary of the corporate trustee.
The revised trust deed of Mr Donovan's super fund required a corporate trustee to be bound by a BDBN, where it satisfied the “Statutory Requirements”. Mr Donovan signed a letter addressed to the corporate trustee, advising that, upon his death, he wished to have his superannuation entitlements distributed to his legal personal representative for inclusion in his estate assets.
On Mr. Donovan's death, his daughter by his first marriage, Lynda (who was the beneficiary under his will), brought an application to seek the court's determination that Mr Donovan's nomination was binding on the corporate trustee, which Mrs Donovan now controlled.
The Court found that the intent of the particular trust deed was to require Mr Donovan's letter to be in the form described in regulation 6.17A (6) of the Superannuation Industry (Supervision) Regulations 1994 (Cmth) to be binding on the SMSF trustees. The court held that the letter was not in the form prescribed by the act. As such Mr Donovan's letter was not a BDBN, & the corporate trustee was accordingly not obliged to distribute Mr. Donovan’s superannuation entitlements to his legal personal representative for inclusion in his legal estate.
In simple words, if you choose to rely on a binding death benefit nomination may be said that you are “quite insane”.
Managing an SMSF estate
In accordance with the provisions of the superannuation laws, specifically section 55(1) of the Superannuation Industry (Supervision) Act 1993 (Cmth) [SIS Act], neither the trustee of a superannuation fund nor any other person, can breach any of the governing rules of the fund. Such a breach may jeopardise the fund’s complying status and thus its concessional tax status. Additionally, it may render the trustee liable to significant monetary penalties or being replaced by a trustee appointed by the Commissioner of Taxation.
The governing rules are defined under section 10(1) of the SIS Act to include the fund’s trust deed and any other rules made by the trustee of the fund including a SMSF Will made on behalf of a member. Therefore, before a SMSF estate plan can be created, a thorough review of the trust deed must be undertaken to determine if the provisions of the Deed allow a SMSF Will to be established.
Below is an extract from Shane Ellis Legal Group's SMSF Trust Deed and Governing Rules, which has been drafted to carefully take into consideration SMSF estate planning needs. Please note it is copyright protected.
1.1.78 SMSF WILL means the non-lapsing binding death benefit nomination created pursuant to Rule 10.6 with terms and conditions which when executed by the Member of the Fund and delivered to and accepted by the Trustee of the Fund are binding on the Trustee as a special rule of the fund. An SMSF Will is a Special Rules Document of the fund.
10.6 BINDING DEATH NOMINATIONS AND SMSF WILLS
10.6.1 A Member may provide the Trustee with a Binding Nomination or an SMSF Will.
10.6.2 A Member may vary any such Binding Nomination or SMSF Will at any time in writing prior to the Member’s death. A Member's properly appointed enduring attorney may not vary a Binding Nomination unless specifically permitted under the Binding Nomination or SMSF Will.
10.6.3 If a Member makes a Binding Nomination or SMSF Will, that Binding Nomination or SMSF Will shall prevail over any previous inconsistent Binding Nomination or SMSF Will.
10.6.4 The death benefits payable under a Binding Nomination or SMSF Will are deemed to be payable to the Legal Personal Representative of a Member if those words or similar words such as "Executor" or "Trustee of my deceased estate" which indicate an intention to pay the Death Benefit to the Member’s estate.
10.6.5 A Binding Nomination or SMSF Will will not lapse unless the Binding Nomination or SMSF Will expressly provides that it will lapse.
10.6.6 A SMSF Will is a non-lapsing binding death benefit nomination with terms and conditions which when executed by the Member of the Fund and delivered to and accepted by the Trustee of the Fund are binding on the Trustee as a special rule of the fund. A Member's Legal Personal Representative or duly appointed Guardian cannot vary a member's SMSF Will.
10.6.7 A SMSF Will is a Special Rules Document of the fund.
10.6.8 The Trustee:
10.6.8.1 shall not be obliged to accept any part of a Binding Death Nomination or SMSF Will, where the part of the Binding Death Nomination or SMSF Will makes provision for a Beneficiary who is not a Dependant of the Member.
10.6.8.2 will pay the death benefits referred to in the part of a Binding Death Nomination or SMSF Will they have not accepted preferably to the Member's Legal Personal Representative, or to such Dependants as determined by the Trustee.
10.6.9 The Trustee shall be obliged to accept that part of the Binding Nomination or SMSF Will, which makes provision for valid Dependants of the Member.
Astute SMSF estate planners make use of an SMSF Will to steer their SMSF estate where they want it to go upon their death. A properly drawn SMSF Will becomes a binding rules document of the SMSF that cannot be varied by anyone except the Member once accepted by the Trustees of the SMSF. Not even by the member’s Enduring Power of Attorney or Adult Guardian. This provides great security for the member in relation to their death benefits.
Our SMSF deed has been specifically designed to protect our clients. A death benefit binding direction allows the member to direct the trustee as to how their death benefits are to be distributed and in what form. Additionally, it can direct the trustee as to who the deceased member‘s replacement trustee is to be. This is achieved by writing or embedding into the Fund’s governing rules the member’s death benefit binding direction so that it has the force of the trust deed and the SIS Act.
The death benefit binding direction inside an SMSF Will provides a member with the most secure option in terms of their SMSF estate planning. One may say it is the sanest way for you to proceed with your SMSF estate planning.
Couple this with auto-reversionary pension documents and your SMSF death benefits are soundly protected for those who you intend to receive them.
A person wishing to create an SMSF Will and auto-reversionary pension documents must seek expert advice from SMSF Law Equity protect prior to finalising any documents.
Deeds prior to 1 July 2017
Major changes took place in the SMSF laws from November 2016, many of which commenced from 1 July 2017. Now there are many approaches and strategies that will differ from the past and it is essential to ensure that your SMSF deed does not restrict you in anyway. If your SMSF deed is from before 1 July 2017, it cannot be up to date.
*Shane Ellis is the Managing Legal Practitioner Director of the Shane Ellis Legal Group including SMSF Law Equity protect. He is a Senior Consulting Lawyer specialising in SMSF estates and law, family estate planning, asset protection structuring and business structures. He is one of few lawyers in Australia to hold SMSF Association Accredited SMSF Specialist Advisor status and ASIC RG 146 Specialist Self-Managed Superannuation Fund Accreditation. He has won Best of the Gold Coast Awards for three consecutive years for quality of legal services. He speaks regularly to business and professional groups on SMSF estate planning; asset protection and business structures and for the Queensland Law Society Magazine 'PROCTOR' on patterns for success in business.
Disclaimer: Please note that this information is general in nature and should not be relied upon for decision making or taken to be providing advice without you seeking expert opinion. Shane Ellis, Senior Consulting Lawyer, the Shane Ellis Legal Group & SMSF Law/ EquityProtect exclude all liability relating to you relying on this information.
1 See MCFADDEN –V- PUBLIC TRUSTEE FOR VICTORIA  1 NSWLR 15,22)