Pitfalls in Superannuation and Estate Planning – Your Super payout may not go to your intended beneficiary

A number of recent decisions have highlighted the dangers of superannuation trust fund and death benefits not being paid out in accordance with the deceased’s wishes or intentions, and potentially leaving family members without benefits or support.

This is particularly the case with Self-Managed Super Fund (“SMSF”) arrangements where particular attention has not been paid to the Trust Deed provisions or misunderstandings the nature of the Trust Deed and the roll of binding nominations, pensions and revisionary pensions.

As with any estate planning there are a varying range of possibilities that might exist at the time of death. Depending on the age of the member of the trust fund these can either be reasonably flexible or discretionary on one hand, or reasonably restricted, on the other.

The Trust Deed provisions and arrangements such as nominations must tie in with general estate planning. Some of the issues that can arise are:

Payment of death benefits to an insolvent estate. (Your debts could eat up all of your super funds and leave nothing for your intended beneficiaries!)
Challenges to the estate and potentially the superannuation fund, particularly in NSW pursuant to part 3.3 of the Succession Act 2006.
The role and validity of binding death benefit nominations.
Replacement of the trustees of SMSF’s and/or directors of companies as trustees on death.
The priority of a reversionary pension and/or Binding Death Benefit Nomination (“BDBN”).

Not all industry and retail funds allow BDBM’s. This can be viewed as a potentially difficult issue as death benefits may be paid to an insolvent state, potentially incur adverse tax consequences and otherwise limit the members freedom to choose who should receive the death benefits amongst their dependants.

It should be noted that a step child can be defined as a dependent and may be eligible for a payment of death benefits by way of the trustee’s discretion. This may or may not be desirable depending on the member’s circumstances.

While 16.17A of the Superannuation Industry (Supervision) Regulations allow BDBNs, this is in effect an option and many retail and industry trust deeds restrict the use of these nominations. In addition the process and forms specified by the Trust Deed if DBDNs are allowed, must be followed or the nomination will likely be invalid.

In the matter of Wooster v Morris [2003] VSC 594 there was a contest over the payment of death benefits from Mr Morris’ SMSF worth approximately $925,000. Mrs Morris was left managing the trust and elected to pay Mr Morris’ death benefits to herself rather than his two daughters from a previous marriage. While the daughters were ultimately successful in recouping the benefits, legal fees of approximately $300,000 were incurred. The reality is that the person holding the ‘purse strings’ is left with authority and often has a discretion to make decisions affecting the payment of death benefits.

A similar issue arose in the matter of Ioppolo v Conti [2015] WASCA 45. In this matter Mr Conti was also left as the sole trustee of the SMSF. In that capacity he elected to take the full benefits from the trust fund in the form of a pension. While Mrs Conti had made a Will naming two of her children as executors and bequeathing her interests in the SMSF to her four children, these wishes were not carried out. The children received no benefit from the SMSF. The court found that there was no specific requirement that upon the death of a trustee, that their legal personal representative be appointed as a replacement trustee for the deceased. Had the trust deed specified that a replacement trustee be appointed before any decision as to a distribution could be made, the SMSF could have been more equitably distributed.

Proper estate planning requires a careful overview of the trust fund whether it be a retail and/or an industry fund or an SMSF. Many precedent trust funds for SMSF’s do not adequately deal with many of the situations that can arise including contest between children and spouses, often of second marriages, and as to who receives the superannuation funds.

In NSW specific legislative provisions exist to make a claim for provision from an estate, and this can include superannuation funds. Even so, this can be an expensive process and does not necessarily result in an outcome that the deceased or member of the superfund would have wished or intended.

Issues as to the trustees’ discretion, the terms of the trust deed, and the nature of death benefit nominations, need to be carefully considered if the intended dependants are to receive a share of your estate. Ideally this should be considered before entering into a SMSF or, in the case of retail or industry funds, the choice of fund needs to be considered. It is all too easy for your dependants to be shut out of your estate and left without the provisions you had intended for them. Particular consideration is required in relation to second marriages, children to second marriages and step children, given the complications that can arise with regard to existing and potentially inadequate estate planning provisions.

You may think you have it right; to be sure have your affairs for Estate Planning reviewed by an experienced solicitor. The investment you make today, can save enormous expense and heartache to your beneficiaries in the future.