Why it's imperative to keep your SMSF estate plan updated
March 2014
A recent decision handed down by the W.A. court highlights the importance of making a valid binding death benefit nomination for an SMSF and the connection between assets that are controlled by the will, and those controlled by the terms of the trust deed.
In this case, Mr and Mrs Conti were married but estranged and they had an SMSF in which they were the sole member trustees. Mrs Conti made a will in January 2005 and appointed two of her four children executors. She expressed the desire that all of her entitlements held in the SMSF be paid to her children. She specifically stated that she did not want any of her superannuation entitlements to be paid to her husband.
Mrs Conti died on 5 August 2010. Her will had remained unchanged at the date of her death. Her entitlements in the SMSF amounted to $648,586. At the time of her death, Mrs Conti had not made a current death benefit nomination. She purported to have made a binding death benefit nomination in April 2006, which had lapsed.
The terms of the trust deed stated “In the absence of a binding direction from a deceased member the trustees may in their absolute discretion pay or apply the amount of the funds standing to the credit of a deceased member’s account to a spouse or child of the member or any other person who in the opinion of the trustees was a dependent or on the member at the relevant time.”
After Mrs Conti’s death, Mr Conti established a corporate trustee as the sole trustee of the fund and then made a resolution transferring all Mrs Conti’s superannuation benefits to himself and not to the beneficiaries (ie his children) mentioned in Mrs Conti’s will.
Mrs Conti’s children took legal proceedings against their father and applied to the Court to be appointed as trustee of the fund.
The Court found against the executors of the estate in seeking to claim the superannuation death benefits in accordance with the terms of the will and in fact made a “special costs order” against them.
The Court stated Mr Conti was within his rights to pay all of his wife’s superannuation benefits to himself as the deed specifically gave him this power in the absence of a written binding death benefit nomination.
This highlights the current view of the courts that they will take a strict “black letter” trust law view of the application of superannuation death benefits as written in the trust deed of the fund.
Key notes for clients:
1. It’s vital to read and understand the trust deed as it applies the superannuation death benefits. Reviewing your deed on these issues should be undertaken on a regular basis and as part of a review of your estate plan. Whenever the deed is updated, the estate plan should be reviewed, as the new provisions of the deed may invalidate an earlier death benefit nomination, even one expressed to be binding.
2. A person’s will has no control over how a deceased person's superannuation benefits are paid, even if there is no written or valid binding death benefit nomination.
3. Mrs Conti’s binding nomination made in April 2006 (which had lapsed) directed her superannuation death benefits to her husband, and yet her will purported to direct them to her four children. This conflict was merely noted by the Court, however its existence identifies that either Mrs Conti or the lawyer who drew her will fundamentally misunderstood the lack of control the will has over superannuation death benefits, and failed to take into consideration the trust deed and the death benefit provisions.
4. In the absence of a valid and binding death benefit nomination, whoever is the surviving member of the fund effectively takes control of the fund and its assets. This is particularly the case where the surviving member acts promptly and within the six-month period to convert the fund to a single member fund with a corporate trustee in accordance with section 17A(2) of the SIS Act. In the Conti case this maneuver effectively locked out the executors of Mrs Conti’s will from being appointed trustees who could have otherwise had a say in how her superannuation benefits were paid.
5. Despite any contrary wishes expressed in the will (or a non-binding death benefit nomination for that matter), the surviving member’s self interest in exercising a discretion to paying the deceased member’s superannuation benefits to him or herself does not constitute “bad faith” nor is it an improper exercise of the power or function of the trustee.
If you have any questions regarding this, or any other SMSF matter, please contact Adam Passwell, on 0244 55 5333.