Challenging super death benefits payments: Do clients really know who gets their super on death?

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1 OCTOBER 2017 Challenging super death benefits payments: Do clients really know who gets their super on death? PRESENTED AT LEGALWISE SEMINAR OCTOBER 2017 Contact details Laura Hanrahan Senior Associate P E l.hanrahan@hopgoodganim.com.au Paper last updated October 2017

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3 Challenging superannuation death benefits payments: Do clients know who gets their super on death? Examine who can receive superannuation death benefits and the steps a member can take in their estate planning to ensure their superannuation death benefits are paid in accordance with their wishes. Binding death benefits nominations, trustee company control, and reversionary pensions Cases on death benefit payments and how to challenge a death benefit payment Case study: how the transfer balance cap will impact the payment of death benefits and whether the transfer balance cap opens up any new avenues for challenging a death benefit payment 3 HOPGOODGANIM LAWYERS

4 Introduction Superannuation is increasingly a major asset for most Australians. The aim of this paper is to examine who can receive superannuation death benefits and the steps a member can take in their estate planning to ensure their superannuation death benefits are paid in accordance with their wishes. Death benefit planning There are a number of different elements that must be considered when dealing with superannuation death benefits, including: the terms of the fund s trust deed, which are paramount and must be complied with; the requirements of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act) and Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations); where there is a corporate trustee, the terms of the company s constitution and the application of the Corporations Act 2001; the tax implications on superannuation death benefits under the Income Tax Assessment Act 1997; and the new transfer balance cap for retirement phase superannuation accounts. Payment of superannuation death benefits It is a common misconception that a member s Will automatically deals with superannuation death benefits. This is not the case: superannuation death benefits do not automatically form part of an estate, and cannot be primarily dealt with in a Will. Who Can Receive Superannuation Death Benefit Payments? Subject to any limitations contained in the superannuation fund trust deed, a death benefit can only be paid to a dependant of the deceased, or to the legal personal representative of the deceased. 1 DEPENDANTS Regulation 6.22 of the SIS Regulations provides that on the death of a member, the deceased benefits must be paid to: the superannuation fund member s legal personal representative (LPR); or one or more of the superannuation fund member s dependants. 1 See Regulation 6.22 of the Superannuation Industry (Supervision) Regulations 1994 (Cth) Section 10(1) of the SIS Act defines dependant to include: a deceased s spouse; a deceased s child of any age; and people who are, at the date of the deceased s death, in an interdependency relationship with the deceased, (SIS Act dependant). It is important to note that the superannuation fund trust deed can limit the above options, and therefore it is important that advisors review the trust deed before giving any advice regarding the payment of superannuation death benefits. The distinction must also be drawn between the SIS Act definition of dependant, which determines who can receive superannuation death benefits directly from superannuation funds, and the income tax definition of dependant in section of the Income Tax Assessment Act 1997 (ITAA 97), which determines the tax treatment of death benefits received (Tax Act dependant). SIS ACT VS TAX ACT It is important to understand the difference between the definitions of a SIS Act dependant and a Tax Act dependant. The differences between the two definitions are outlined in the table below. Dependant: Section 10(1) of the SIS Act Dependant: Section of the ITAA 97 Spouse at date of death Current or former spouse Child of any age Child under 18 years Person with whom the deceased had an interdependency relationship Person with whom the deceased had an interdependency relationship Dependant - ordinary meeting Dependant - ordinary meeting 4 HOPGOODGANIM LAWYERS

5 DEFINITION OF SPOUSE Pursuant to section 10(1) of the SIS Act, spouse includes: a legally married spouse; another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple (i.e. de facto spouse); or another person (whether of the same Section title here sex or different sex) with whom the person is in a relationship that is registered under the law of the State or Territory. Section sub heading Section sub heading Section sub heading Pursuant to section of the ITAA 97 spouse of an individual includes: a legally married spouse; another individual (whether of the same sex or a different sex) with whom the individual is in a relationship that is registered under a State or Territory law; and another individual who, although not legally married to the individual, lives with the individual on a genuine domestic basis in a relationship as a couple. However as noted in the table above, section of the ITAA 97 provides that a death benefits dependant includes the deceased former spouse. A legally married spouse only ceases to be a spouse on divorce not at separation. A registered relationship only ceases upon de-registration or marriage again not separation. Therefore, in relation to the deceased, there can be competing interests from more than one spouse for payment of death benefits. SAME SEX AND DE FACTO RELATIONSHIPS The definition of spouse in the SIS Act was expanded by the Same-Sex Relationship (Equal Treatment in Commonwealth Laws Superannuation) Act 2008 to include people: in a registered relationship; and in a relationship as a couple living together on a genuine domestic basis. Section 2F of Acts Interpretation Act 1901 (Cth) sets out a list of factors relevant in determining whether or not a couple is in a de facto relationship. While the phrase de facto relationship is not used in the SIS Act or SIS Regulations, the factors are useful in assessing whether or not a couple are spouses of the purposes of the SIS Act. The factors are: the duration of the relationship; the nature and extent of the couple s common residence; whether a sexual relationship exists; the degree of financial dependence or interdependence, and any arrangements for financial support between them; the ownership, use and acquisition of their property; the degree of mutual commitment to a shared life; the care and support of children; and the reputation and public aspects of the relationship. Section 4(1) of the Relationships Act 2011 (Qld) (formerly the Civil Partnerships Act 2011 (Qld)) defines registered relationships to be a legally recognised relationship that, subject to this Act, may be entered into by any 2 adults, regardless of their sex. An application to register the relationship must be made, supported by a statutory declaration and the prescribed documents. A registered relationship is terminated: on the death of either party 2 ; on the marriage of either party 3 ; and by application for termination effective once the Registrar registers the termination 4. DEFINITION OF CHILD Pursuant to section 10(1) of the SIS Act, and section of the ITAA 97, a child, in relation to an individual, includes: the individual s adopted child, stepchild, or ex-nuptial child; a child of the individual s spouse; and someone who is a child of the individual within the meaning of the Family Law Act Relationships Act 2011 (Qld), s 14(1)(a) 3 Ibid, s 14(1)(b) 4 Ibid, ss 15 and 18 It is important to note that for superannuation purposes a stepchild ceases to be a stepchild upon the death of the child s natural parent. However the Succession Act 1981 (Qld) has changed this position for the purposes of a will/ intestacy and family provision application. A stepchild will remain a stepchild despite the death of their natural parent. INTERDEPENDENCY RELATIONSHIP Pursuant to section 10A of the SIS Act and section of the ITAA 97, two persons (whether or not related by family) have an interdependency relationship if: they have a close personal relationship; they live together; one or more of them provides the other with financial support; and one or more of them provides the other with domestic support and personal care. Persons may also have an interdependency relationship if they have a close personal relationship and they do not satisfy one or more of the criteria listed above due to one or both of them suffering from a physical, intellectual or psychiatric disability. Interdependency relationships may be relationships between same sex couples 5, but are more often an adult child living with and caring for elderly or sick parents, parents living with and caring for adult children, or siblings residing together. Payments to the estate As noted above, SIS Regulation 6.22(2) provides who can receive a death benefit. A deceased death benefit must be paid to either the member s LPR, or one or more of the member s dependants. Accordingly, death benefits may be paid to a member s estate irrespective of whether the member had any surviving SIS Act dependants or not. However, if the member dies without leaving one or more SIS Act dependants, then the superannuation death benefits must be paid to the estate 6. 5 Only prior to 1 July 2008 after the Same-Sex Relationship (Equal Treatment in Commonwealth Laws Superannuation) Act 2008 amended the definition of spouse to include same-sex couples 6 SIS Regulation, 6.22(2). 5 HOPGOODGANIM LAWYERS

6 If the superannuation fund trustee has made reasonable enquiries, and still cannot find either a LPR or a dependant of the deceased, the trustee may pay the death benefit to such other individual as the trustee determines 7. How is it paid? Subject to any restrictions contained in the governing rules of the superannuation fund and in SIS Regulations 6.21(2) and 6.21(2A), a death benefit can be received in the form of a lump sum (includes an in specie transfer of assets), an income stream or a combination of the two. A death benefit must be cashed as a lump sum to the deceased s LPR and/ or one or more of the deceased s SIS Act dependants, unless the SIS Regulations permit income streams to be paid. A lump sum can also include an in specie transfer of assets to a beneficiary. As noted above, SIS Regulation 6.21(2A) limits the payment of death benefits in the form of income streams to entitled recipients : dependants of the deceased under the SIS Act; and in the case of children of the deceased: to children who are less than 18 years of age; or to children who are 18 years or more, but only if such children: are financially dependent on the deceased and less than 25 years of age; or have a disability of the kind described in subsection 8(1) of the Disability Services Act If a death benefit is paid in the form of an income stream to a child who is less than 25 years of age, the income stream must be commuted to a lump sum upon the child attaining age 25 (unless the child has a disability in which case the income stream may continue). Accordingly, a death benefit can generally only be paid, by way of income stream, to the following persons: the deceased s spouse; persons who were financially dependent upon the deceased at the time of the deceased s death; a child of the deceased under the age of 18; a child of the deceased under the age of 25 years who was financially dependent on the deceased at the time of the deceased s death; and a person with whom the deceased had an interdependency relationship with at the time of the deceased s death. The table below provides a summary of the form of death benefits that can be paid and to whom those death benefits can be paid: Controlling Superannuation There are two levels of control in superannuation. Trustee control and member control. In retail and industry superannuation the trustee is a board and an individual member has no influence in the makeup of the board members. Selfmanaged funds are very different in that the members are also the trustees of the fund. TRUSTEE CONTROL Only relevant in self-managed funds and in advising clients with self-managed funds you must review the latest trust deed and if a corporate trustee is involved you should also review the constitution of the trustee company. The reason for this is superannuation is a trust, but unlike your typical family discretionary trust superannuation is perpetual. In accordance with the SIS Act, SIS Regulations and the terms of the SMSF s trust deed, a trustee must deal with a deceased member s benefits. 7 Ibid, 6.22(3) Person SIS Act Dependant Tax Act Dependant Lump sum or Pension Current husband / wife Yes Yes Either Former husband / wife (divorced) No Yes N/A De facto husband / wife Yes Yes Either Same sex de facto Yes Yes Either Child under 18 Yes Yes Child aged 18 to 25 and financially dependent Child aged 18 to 25 and not financially dependent Yes Yes Yes No Lump sum Either (but an income stream must be commuted on turning 25 unless disabled) Either (but an income stream must be commuted on turning 25 unless disabled) Child aged over 25 and financially dependent A person who is financially dependent on the deceased A person who was in interdependency relationship with the deceased Yes No Lump sum Yes Yes Either Yes Yes Either 6 HOPGOODGANIM LAWYERS

7 If the deceased member had not implemented one of the member control measures discussed above, then the trustee will have the obligation and discretion to decide which of the eligible parties will receive the death benefit or a proportion of the death benefit. The decision of Katz v Grossman [2005] NSWSC 934 highlights how critical it is to address the issue of succession of trustee control on the death of a member. MEMBER CONTROL Subject to the provisions of the relevant trust deed a member can take steps to control the payment of their death benefits by anyone or more of the options already outlined above. Careful consideration should be given to any decision by the member to take control of the payment of death benefits as removing the discretion of the trustee creates certainty and inflexibility upon the death of the member. When clients choose to implement one of these control measures it is important that the estate plan is reviewed regularly to ensure the measure remains appropriate. There are significant consequences of using these control measures inappropriately. Control by the member should also be considered in the context of substitute decision makers i.e., the enduring attorney of a member. In drafting an Enduring Power of Attorney for a client you must consider that an attorney may in exercise of their powers deal with the principal s superannuation interests. The Superannuation Complaints Tribunal in a determination (D07-08/030) 8 confirmed and acknowledged an attorneys power to complete and sign a BDBN on behalf of a member. As a result many of the retail and industry funds have amended their rules to specifically prohibit attorneys signing BDBN on behalf of a member. It may be necessary to limit or direct the use of this power by an attorney. One obvious measure which can be included in an Enduring Power of Attorney particularly if the client has a lapsing BDBN is to include power for the attorney to confirm the existing BDBN but not to revoke or amend. Even if the retail or industry 8 D07-08\030 [2007] SCTA 93 (3 September 2007) fund doesn t presently allow attorneys to confirm, revoke or make BDBN on behalf of a member I would still include this power in the Enduring Power of Attorney document. There are circumstances where the lack of certainty created by a trustee s wide discretion can be problematic. For example, it will be particularly important to remove a trustee s discretion where: the member is part of a blended family and wants their superannuation to be paid to a particular family member (for example, the member s children from their first marriage, rather than to their second spouse); there is likely to be argument between the member s possible beneficiaries as to who should receive the death benefits; there is a risk of dispute between the controllers of the superannuation fund following the member s death; or there is a risk that the controllers will not distribute the death benefits in accordance with the member s wishes. There are a number of ways that a trustee s discretion in relation to the distribution of death benefits can be removed. Controlling Death Benefit Payments There are generally four ways in which a member can choose to deal with payment of their death benefits: non-binding death benefit nomination; lapsing binding death benefit nomination; non-lapsing binding death benefit nomination; and nominating a reversionary beneficiary for a pension. The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the superannuation fund, and not in accordance with the terms of the deceased members Will. The payment of death benefits from a superannuation fund is therefore ultimately a matter for the discretion of the trustee of the fund, unless legislation or the superannuation fund s governing rules provide otherwise. Section 55A of the SIS Act, which applies to the 2007/08 and later income years, provides that the governing rules of a regulated superannuation fund must not permit a fund members benefits to be cashed after the members death otherwise than in accordance with the SIS Regulations. The governing rules of a fund are invalid to the extent that they are inconsistent with this provision of the SIS Act. As noted above the SIS Regulations provide that death benefits may, subject to certain limited exceptions, only be paid to a member s LPR, or one or more of the member s dependants. Subsection 59(1) of the SIS Act contains a prohibition against the governing rules of a superannuation fund permitting discretion to be exercised by a person other than the trustee, but this prohibition does not apply to self-managed superannuation funds (SMSFs). Despite this prohibition subsection s59(1a) allows the governing rules of a fund to permit a member to give the trustee a notice in accordance with the SIS Regulations requiring the trustee to pay the member s death benefit to the LPR or dependants of the member. Non-Binding Death Benefit Nomination As the name suggestions, this type of nomination does not bind the trustee. Generally, when making an application for membership of a superannuation fund, a superannuation fund member is given the option to make a non-binding nomination. This nomination is effectively the nomination of a preferred beneficiary, and without doing more, the power to make the final decision as to whom death benefits will be paid still rests with the trustee. As discussed above, the trustee s decision must be made in accordance with SIS Regulation It is also important to note that under general trust law, a trustee must act in good faith, responsibly and reasonably. It seems to me that there is little upside to a non-binding nomination and perhaps that is because in preparing estate plans for clients one objective is to provide certainty for your clients. Particularly with clients who have super in a retail or industry fund we cannot plan appropriately including their death benefits if we do not know where it will be paid, this is crucial in 7 HOPGOODGANIM LAWYERS

8 blended families when there is likely to be competing claims on the death benefits. Non-binding nominations have more of a role in SMSFs because we can control the succession of the trustee, i.e., control the person/s who have the discretion to pay the death benefits. Lapsing Binding Death Benefit Nomination The SIS Regulations allow members of regulated superannuation funds to make binding death benefit nominations. A valid binding death nomination binds the trustee in respect of the payment of the deceased s death benefits, which effectively removes the trustee s decision making power. SIS Regulation 6.17A provides that the trustee must pay the member s benefit to the persons nominated if: the person nominated is the LPR or a SIS Act dependant of the member; the proportion of the benefit that would be paid to that person is certain, and readily ascertainable from the nomination; the notice is in writing, signed and dated by the member in the presence of two witnesses (each over the age of 18 and neither being a person who is nominated in the notice), and contains a declaration, signed and dated by the witnesses stating that the notice was signed and dated by the member in their presence; and the nomination is in effect. SIS Regulation 6.17A(7) provides that a binding nomination that is made in accordance with the restrictions outlined above, will cease to have effect at the end of the period of three years, after the day the nomination was first signed, or if the governing rules of the fund fix a shorter period, then at the end of that period. Although the SIS Act and SIS Regulations allow superannuation fund members to make binding death benefit nominations, the governing rules of the superannuation fund trust deed must also give the member the power to make a binding death benefit nomination. Accordingly, it is important to review the governing rules of the superannuation fund to confirm that the fund permits the making of binding death benefit nominations. It is also important to note that SIS Regulation 6.17A does not apply to SMSFs. That is, a SMSF can, by the terms of its trust deed, set out its own requirements for the making of a binding death benefit nomination. As you will see from the recent case law (discussed later in the paper) making a BDBN in accordance with the terms of an SMSF trust deed is paramount to ensuring the nomination will be binding. The main limitation of lapsing BDBNs is the member losing capacity and being unable to confirm the BDBN before it lapses. Although some of the good SMSF deeds allow an attorney of the member to exercise the member s rights if the member is incapacitated it is also important that the member address issue in their enduring power of attorney document. To address the issue sufficiently the member should decide whether they want their attorney to have power to exercise their rights as member of the fund and make express directions or limitations in the enduring power of attorney. Also consider whether power to enter conflict transactions should be included i.e., if the attorney is given power to confirm, make, revoke or change a binding death benefit nomination and the attorney is a potential beneficiary. Another limitation with BDBNs in retail and industry funds is their inflexible forms which typically do not allow an alternate nomination. Non-Lapsing Binding Death Benefit Nomination The SIS Regulations in relation to binding death benefit nominations have no application to SMSFs. The Commissioner of Taxation released a SMSF determination that provides that section 59 of the SIS Act and SIS Regulation 6.17A do not apply to SMSFs. This means that the governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in SIS Regulation 6.17A. Subsection 55A(2) of the SIS Act provides that a death benefit nomination is not binding on the trustee, to the extent that it nominates a person who cannot receive a benefit in accordance with the operating standards set out in the SIS Regulations. As noted above, subject to limited exceptions specified in the SIS Regulations, death benefits must be cashed in favour of a member s LPR and/ or one or more of the member s SIS Act dependants. In essence a non-lapsing binding death benefit nomination is only available if the trust deed of the SMSF gives its members the power. As we will see in the relevant case law it is vital that any nomination in an SMSF is in accordance with the requirements of the specific SMSF deed. I have seen and continue to see advisers who have a pro forma BDBN and just roll it out for each client without checking that it complies with the specific SMSF deed of the client. This practice is dangerous. These are a fantastic tool, providing you have the right powers in the deed and the members do not have any connection with NSW, they provide certainty for the client and can be tailored to provide for various income streams, lump sum payments or transfer of assets in specie to the respective dependants. Reversionary Beneficiary When a member commences an income stream prior to their death, the member can nominate a reversionary beneficiary to receive the payments from the income stream upon the member s death. The continuation of the member s income stream will be subject to the reversionary beneficiary being an entitled recipient the SIS Regulations. The trustee of the fund generally has no discretion in relation to the payment of the pension to the reversionary beneficiary. But caution should be exercised to avoid a client nominating a reversionary beneficiary when commencing an income stream which is inconsistent with a BDBN. Done properly a reversionary beneficiary nomination will prevail over a BDBN in respect of the pension account. However the answer must be determined by examination of the pension documents and the trust deed in each case. A reversionary beneficiary nomination is a great estate planning tool as it provides certainty and means the recipient of the reversionary pension does not have to wait for the trustee to make a decision with respect to the member s pension. That is, 8 HOPGOODGANIM LAWYERS

9 the member s pension becomes payable to the reversionary beneficiary immediately upon the member s death. Unfortunately however, the ability to pay a reversionary pension is limited to individuals who are SIS Act dependants of the member and who are entitled recipients. There are some additional complications now for members with transition to retirement income streams (TRIS) wanting to have a reversionary beneficiary nomination which the addition of the new definition in the SIS Act of Retirement Phase. In short a TRIS is not Retirement Phase income and once a TRIS always a TRIS meaning the nomination of a reversionary beneficiary in a TRIS will only be effective if the reversionary beneficiary is eligible to receive a TRIS at the time of death of the member. Having a reversionary beneficiary means that on the death of the pensioner, the reversionary beneficiary is admitted to the fund as a member, they stand in the shoes of the deceased pensioner and they become the member with the rights and obligations in relation to that pension. Impact of Transfer Balance Cap It is important to bear in mind that as at 1 July 2017, a death benefit pension (other than a child pension) will count towards the $1.6 million transfer balance cap of the recipient pensioner when the pension starts. This means that a death benefit pension can only be paid to the extent that it would not cause the recipient to exceed their transfer balance cap. Where a pensioner has already used up their transfer balance cap on their own pension, any amount paid to them on the death of their spouse as a reversionary pension or death benefit pension will cause them to exceed their transfer balance cap. A recipient s options to ensure they do not breach their transfer balance caps are: to commute some or all of their existing pension back to accumulation phase or remove it from the superannuation system so that the combined balance of their existing pension plus the reversionary or death benefit pension does not exceed $1.6 million; or take enough of the deceased s death benefit as a pension so as to reach the balance transfer cap, and take the excess of the deceased s death benefit as a lump sum death benefit payment. Depending on the age of the recipient, the age of the deceased and the length of time between the deceased s death and payment of the benefit, the second option may be more tax effective. For example: As at 1 July 2017, Sally and Daniel each have an individual pension account of $1.6 million and an accumulation account of $400,000. When Daniel dies in 2020, Sally and Daniel s pension accounts are each worth $2 million and their accumulation accounts are worth $500,000. Sally s first option is to maintain her own pension and accumulation accounts. Given she has already reached the transfer balance cap, she cannot receive any further pensions. If Sally is to receive Daniel s death benefits, his $2.5 million must be paid to Sally as a lump sum. Alternatively, Sally could commute her existing pension back to her accumulation account. This would result in a $2 million debit to her transfer balance account, allowing her to receive Daniel s entire death benefit pension. Daniel s $500,000 accumulation fund would need to be paid to Sally as a lump sum. In this scenario, Sally would have a total of $4.5 million in superannuation, being the Daniel s death benefit pension of $2 million, and an accumulation account of $2.5 million. REVERSIONARY PENSIONS Where a pension automatically reverts to a reversionary beneficiary, the credit to the reversionary beneficiary s transfer balance account will not occur until 12 months after the member s death. Otherwise, the credit balance transfer occurs when the decision to pay the death benefit as a pension is made. This means that reversionary beneficiaries have an extra 12 month period to sort out the receipt of their pension, even where the pension would cause them to exceed their transfer balance cap. CHILD PENSIONS All or part of a person s death benefits can be paid to or amongst the person s children who are: (a) under 18; (b) under 25 and dependant; or (c) disabled, bearing in mind that, as outlined above, in the case of (a) and (b) the pension must be commuted to a lump sum when the child turns 25. However, there are special rules for death benefit pensions paid to children. Essentially, a deceased s children s transfer balance cap will reset when the pension ends. This means the child will have a full $1.6 million balance transfer cap when they receive their own superannuation. Unless the child is disabled, this will usually occur when the child turns 25. The child caps operate differently depending on whether their parent has a transfer balance account at the time of their death. If the deceased parent did not have a transfer balance account (i.e. they were not drawing a pension and their benefits were in accumulation phase), the child may receive pension benefits up to the value of the transfer balance cap of $1.6 million. Where there is one child, that child will receive the full cap. Where there is more than one child, then the children will receive a percentage of their parent s cap in the same proportion that they will receive the death benefits; If the deceased parent had a transfer balance account, the child may receive a proportionate share of their parent s pension benefits in the form of a pension. 9 HOPGOODGANIM LAWYERS

10 Case law There is a growing body of case law demonstrating the various ways in which payment of death benefits are being challenged and the latest changes to superannuation are bound to unearth future challenges. 1. Disputing the validity of death benefit nominations DONOVAN V DONOVAN [2009] QSC 26 A common issue which arises in SMSF trust deeds is a requirement that a BDBN complies with the provisions of the SIS Act or the SIS Regulations. This was the issue which arose in the decision of Donovan v Donovan [2009] QSC 26. Facts In Donovan v Donovan, the Supreme Court of Queensland considered whether a letter written by a member of an SMSF to the corporate trustee of the fund constituted a valid binding death benefit nomination. Mr Donovan was a member of the SMSF and the director of the trustee company. The trust deed relevantly provided: (a) A member may make a [BDBN] in the form required to satisfy the Statutory Requirements ; (b) Statutory Requirements was defined to include any law which must be satisfied by a superannuation fund in order to qualify for income tax concessions ; (c) Where a member had made a valid BDBN, the trustee must pay the death benefit to the nominated legal personal representative or dependant of the member. By letter dated 10 April 2006, Mr Donovan purported to make a nomination to the trustee which specified his benefits were to be paid to his legal personal representative for inclusion in his estate assets. Following Mr Donovan s death in 2007, Mr Donovan s second wife and his daughter from his first marriage were appointed executors of his estate. Mr Donovan s wife argued the nomination was binding; his children from his first marriage disputed this for two reasons: (a) the language used in the letter was insufficient to convey a binding intention. The letter indicated Mr Donovan wished his benefits to be paid to his legal personal representative, rather than directed or required; (b) the nomination did not comply with the Statutory Requirements. Fryberg J held that the reference in the trust deed to the Statutory Requirements was a reference to the requirements of regulation 6.17A(6) of the SIS Regulations. The formalities of the SIS Regulations required the nomination to be in writing, witnessed by two adults and contain a signing declaration from the witnesses. The letter prepared by Mr Donovan did not comply with these requirements, and accordingly was not binding on the trustee. As a result of the invalidity of Mr Donovan s nomination, his second spouse received his entire SMSF portfolio instead of it being split 50% to his spouse and 50% to his daughter as provided for in his Will. This position was affirmed by the more recent decision of the Queensland Supreme Court in Munro v Munro [2015] QSC 61. MUNRO V MUNRO [2015] QSC 61 In the decision of Munro v Munro, the Queensland Supreme Court held that a purported BDBN by the deceased, Mr Munro, was invalid because it did not comply with the requirements of the trust deed. Facts In 2004, Mr Munro established an SMSF of which he and his second wife were the members and trustees. The superannuation fund trust deed provided that if a BDBN complied with the deed and the relevant superannuation law, then it must be followed by the trustees. The deed required that a death benefit nomination could only be made in favour of a member s dependants or legal personal representative. In 2009, Mr Munro prepared what he thought to be a BDBN in favour of the Trustee of Deceased Estate. He also prepared a Will, which directed that $350,000 of the death benefits paid into his Estate were to be paid to his second wife, Mrs Munro, with the balance divided equally between his two daughters from a previous marriage. Following Mr Munro s death in 2011, Mrs Munro (as trustee of the superannuation fund) asserted that the nomination prepared by Mr Munro in 2009 was not actually binding because it did not comply with the specific requirements of the superannuation fund trust deed. Accordingly, Mrs Munro contended she was entitled to exercise her discretion as trustee of the superannuation fund and, in accordance with the provisions of the trust deed, pay all of the benefit to herself as the surviving spouse. Mr Munro s daughters applied to the court seeking orders that the binding nomination was valid. Findings However, the court held that the nomination was not a binding nomination for the purposes of the superannuation fund trust deed, nor did it comply with regulation 6.22 of the Regulations. The court held that the use of the term Trustee of Deceased Estate did not appear to mean Mr Munro s legal personal representative. Mullins J observed: It may be that Mr Munro intended by instructing the form be completed with Trustee of Deceased Estate to mean his executors, but it is difficult to reach that conclusion when the form itself provided for the option of specifying a legal personal representative and advised how to complete the form accordingly. Accordingly, Mrs Munro was entitled to pay all of Mr Munro s superannuation death benefits to herself, instead of sharing the benefits between her and Mr Munro s daughters as Mr Munro had intended. The daughters were left with little inheritance. WOOSTER V MORRIS [2013] VSC 594 By way of contrast, in the decision of Wooster v Morris [2013] VSC 594, the failure of a beneficiary to strictly comply with the SMSF deed provisions in relation to how a binding death benefit nomination ought to be served on the trustee was not fatal to the validity of his BDBN. 10 HOPGOODGANIM LAWYERS

11 Facts Mr and Mrs Morris were the only trustees and members of their self-managed superannuation fund. Mr Morris had two daughters from a previous marriage, and Mrs Morris had one son from a previous marriage. Mr Morris made a BDBN on or about 18 March 2008 in favour of his two daughters from his first marriage. Following Mr Morris death on 27 February 2010, Mrs Morris appointed Mr Ashman (her son from her first marriage) as a co-trustee of the self-managed superannuation fund. In May 2011, Mrs Morris and Mr Ashman sought legal advice as to the validity of Mr Morris nomination. The trust deed for the fund required that the nomination be delivered to the trustee. Mr Morris had not posted or otherwise delivered his BDBN to the trustees, being himself and Mrs Morris. On that basis, Mrs Morris and Mr Ashman were advised that the BDBN was invalid as it did not meet all of the trust deed s requirements. Mrs Morris subsequently appointed a corporate trustee (of which she was sole director). The corporate trustee resolved to pay all benefits to Mrs Morris on the basis that the BDBN was defective and not binding. Findings The matter was initially heard by a superannuation referee who determined the BDBN was valid and binding. Mrs Morris appealed to the Victorian Supreme Court. The court declared the BDBN was valid and binding on Mrs Morris and Mr Ashman as former trustees until 18 August 2011, and thereafter the corporate trustee. Unfortunately, the Court did not consider the purported invalidity at length and simply declared it was binding. The plaintiffs were entitled to interest on the amount due to them (approximately $324,000) from 30 June 2010, calculated pursuant to the Penalty Interest Rate Act Costs were awarded against the corporate trustee and against Mrs Morris personally because: (a) Mrs Morris was the only person who would gain from the decision to defend the proceeding (a gain of $924,509.37); (b) separate corporate identity of the trustee should not protect Mrs Morris; and (c) Mrs Morris controlled the position in favour of her own personal stake and, in doing so, failed to take proper account of the interests of the other beneficiaries. There was no right of indemnity out of the SMSF because the corporate trustee, with Mrs Morris as its director, failed to act impartially in the administration of the trust and therefore breached their obligations as trustees. Wooster v Morris is a good example of why advising clients pre-relationship that maintaining their own separate SMSF makes a great deal of common sense to avoid practical problems. The inference in this case is that Mr Morris knew that Mrs Morris would not be happy that he was leaving his superannuation to his daughters from his first marriage, so he made the BDBN but did not actually give her notice as co-trustee. This would not have been a problem if he had maintained a separate SMSF; although maintaining separate SMSFs would incur greater compliance costs for a couple. The failure of a beneficiary to strictly comply with the SMSF deed provisions in relation to how a binding death benefit nomination ought to be served on the trustee may not be fatal to the validity of the binding nomination. Nevertheless, it is important to ensure that death benefit nominations comply with the SMSF deed and superannuation law to prevent the possibility of challenges such as in this case. PERRY V NICHOLSON [2017] QSC 163 The recent Queensland decision of Perry v Nicholson [2017] QSC 163 has placed further emphasis on the importance of ensuring compliance with the terms of the SMSF trust deed. Facts Mr Maurice s SMSF was established in Mr Maurice and his adult daughter, Ms Perry, were the original trustees of the fund. Mr Maurice was the sole member. In 2015, Mr Maurice arranged for his accountants to prepare various documents to remove Ms Perry as trustee and replace her with his de facto spouse, Ms Nicholson. The accountant prepared: (a) minutes of meeting of the trustee of the fund, signed by Mr Maurice, Ms Perry and Ms Nicholson; (b) a confirmation of resignation as trustee, signed by Ms Perry; (c) an application to become a member, signed by Ms Nicholson; and (d) a consent to appointment as trustee, signed by Ms Nicholson. The trust deed provided that: (a) The appointment or removal of a trustee must be in writing and must immediately be advised to any other trustee ; and (b) Binding death benefit notice means a notice given by a member or beneficiary to the trustee in accordance with Regulation 6.17A of the [SIS Regulations] i.e. a BDBN must be provided to the trustee of the fund in order to be valid. On 5 January 2017, Mr Maurice executed a BDBN directing the trustees of the SMSF to pay 100% of his death benefits to Ms Nicholson. On 6 January 2017, he executed a Will leaving his estate to his two adult children and Ms Nicholson equally. Mr Maurice underwent brain surgery the following day. Mr Maurice died on 7 March 2017, having been paralysed since his brain surgery. Following Mr Maurice s death, Ms Perry contended that despite the 2015 documentation she remained a trustee of the SMSF and Ms Nicholson had not been validly appointed. In consequence, she argued that Mr Maurice s BDBN purporting to distribute his entire death benefit to Ms Nicholson was similarly invalid. Findings The court accepted there were some technical deficiencies in the 2015 documents: (a) there was no record of the trustees having accepted Ms Perry s resignation as trustee: rather, the minutes of meeting referred to Ms Perry s removal as trustee; 11 HOPGOODGANIM LAWYERS

12 (b) there was no written notification to Ms Perry of her removal as trustee; and (c) there was no document purporting to advise the other trustee of Ms Perry s removal. Nevertheless, the court held that the minutes of meeting signed by each of the parties was enough to constitute a valid removal of Ms Perry as trustee. Mr Perry s signature on the minutes was considered enough to signify he had been advised of Ms Perry s removal. The court is to hear further submissions from the parties as to the validity of the BDBN. There is a practice of non-lawyers preparing change of trustee documents. As Perry v Nicholson demonstrates, these documents are crucially important. Further, while the requirement that a BDBN must be provided to the trustee of the fund in order to be valid is questionable in the context of an SMSF. While Ms Perry was unsuccessful in her challenge of Ms Nicholson s appointment as trustee, Mr Maurice s failure to strictly adhere to the terms of the SMSF trust deed has led to costly and time consuming litigation, with the result that Mrs Nicholson, his intended beneficiary, has not yet received his death benefits. 2. Absence of valid BDBN Katz v Grossman [2005] NSWSC 934 The decision of Katz v Grossman highlights how critical it is to address the issue of succession of trustee control on the death of a member. Facts Mr and Mrs Katz were members and individual trustees of their SMSF. Mrs Katz died on 28 July Probate of her Will was granted to Mr Katz, he being the sole executor and beneficiary in March Prior to probate being granted, on 18 May 1999, Mr Katz in his capacity as sole trustee of the SMSF, purported to appoint his daughter, Linda Grossman, as a second trustee. The trustees then determined to pay Mrs Katz s death benefits to Mr Katz. On 20 August 2003, Linda Grossman signed documents purporting to admit herself as a member of the SMSF. As part of its decision, the court upheld the appointment of Linda as trustee, but determined her appointment as a member was invalid. On 10 September 2003, Mr Katz died, leaving a Will naming Linda and his son, Daniel Katz, as his executors. There was also a non-binding nomination signed by Mr Katz, expressing the wish that his superannuation death benefits be shared equally between his children Linda and Daniel. Probate was granted to Linda and Daniel on 5 August 2004, which was almost 12 months after Mr Katz s death, and this timing is important. On 5 December 2003 (before probate was granted), Linda as the continuing sole trustee purported to appoint her husband, Peter Grossman, as a joint trustee of the SMSF with her. The appointment was made by deed of appointment, and expressed to be in accordance with the Trustee Act 1925 (NSW). This was the same provision Mr Katz had relied on, in appointing Linda as trustee. Peter and Linda refused to confirm the death benefits would be paid out equally to Linda and Daniel, in accordance with the non-binding nomination left by Mr Katz, so Daniel commenced proceedings challenging the appointment of Linda and Peter as trustees. Findings Under the SMSF trust deed, the members of the fund held the power to appoint a trustee, the court considered the appointment of Peter, in light of these terms. Due to Linda s appointment as a member, being held not to be valid, the only validly appointed member of the fund was Mr Katz. On Mr Katz s death, the power of appointment exercisable by him as a member, vested in his executors. But, the SMSF deed also contained a provision requiring any vacancy in the office of trustee to be filled within 90 days. The appointment of Peter as a trustee occurred 13 days prior to the expiry of that period, and the court was of the view that no appointment by the executors was likely to occur within the 90 day period. In the absence of the trustee being appointed pursuant to the terms of the trust deed within the required time, the court agreed Linda was permitted as a continuing trustee to appoint a further trustee. The power on which the court relied is found in section 6(4)(b) of the Trustee Act 1995 (NSW). This section provides that where a trustee is dead, a new trustee may be appointed by the surviving or continuing trustees, if no person is nominated for that purpose by the instrument creating the trust. The court was of the view that the failure to exercise the power of appointment which vested in the executors, within a reasonable time, meant that section 64(b) could be relied upon. The ultimate result in this case was that Linda and her husband Peter, as the trustees of the SMSF decided to pay the whole of Mr Katz s death benefits to Linda directly. There is no grounds on which Daniel Katz could have challenged the trustee s decision, as it was an SMSF, which is probably why his application was brought challenging the validity of the appointment by Linda, of her husband as trustee. IOPPOLO V CONTI [2015] WASCA 45 The case of Ioppolo v Conti [2015] WASCA 45 demonstrates that, in exercising its discretion as to the distribution of a death benefit, a trustee is not bound to follow a direction in the deceased member s Will. Facts In 2002, Mr and Mrs Conti established an SMSF of which they were the members and trustees. At the same time, Mrs Conti made a BDBN in favour of Mr Conti. In 2005, Mrs Conti made a Will specifically stating that her superannuation entitlements (approximately $648,000) were be paid to her four children from a previous marriage, and that her husband not receive any benefit. She appointed two of her children as her executors. In 2006, Mrs Conti made a second BDBN in favour of Mr Conti. This nomination lapsed in By the time of Mrs Conti s death in 2010, she left no valid BDBN. 12 HOPGOODGANIM LAWYERS

13 Following Mrs Conti s death, Mr Conti sought legal advice in respect to his rights and obligations as the surviving trustee of the SMSF. Mr Conti was advised that he could continue as sole trustee of the SMSF until six months after Mrs Conti s death. His solicitors recommended that shortly before the expiration of this period he appoint a second or corporate trustee. They also advised that Mr Conti could pay the death benefit to himself. On the basis of this advice, Mr Conti took control of the self-managed superannuation fund. He paid the death benefits of almost $650,000 to himself, against Mrs Conti s express wishes. The following day Mr Conti resigned as trustee of the SMSF and appointed a corporate trustee of which he was the sole director. Mrs Conti s children commenced proceedings in the Supreme Court of Western Australia against Mr Conti and the corporate trustee. They claimed that: (a) upon Mrs Conti s death, Mr Conti was required by s 17A of the SIS Act to appoint one of Mrs Conti s executors as trustee of the SMSF in place of himself; and (b) until such time, Mr Conti had no power to deal with the death benefit. The children also claimed that the Mr Conti s decision was void on the basis that Mr Conti had acted in bad faith in making the determination, by preferring his own interests to that of Mrs Conti s children despite Mrs Conti s testamentary intention. Findings Nevertheless, the court determined this distribution to be a valid exercise of Mr Conti s discretion as trustee. The Court of Appeal held that s 17A of the SIS Act defines the conditions that must be met if a fund is to fall within the definition of SMSF for the purposes of the SIS Act. Accordingly, while the appointment of an executor as trustee would have permitted, it was not required by the Act. Further, the Court of Appeal held that there was no evidence to support the children s contention that the exercise of Mr Conti s discretion was trustee was vitiated by lack of bona fides. The court said: It was open to Mr Conti to consider that the subsequent execution of the binding nomination [in 2006] meant that the expression of intention in the will [made in 2005] had been superseded, and was no longer worthy of weight as an expression of the intention of the deceased member as to what should happen on her death. Ultimately, Mrs Conti s Will was of no consequence. Mr Conti was entitled to pay the death benefit to himself, rather than to Mrs Conti s children as she had intended. MCINTOSH V MCINTOSH [2014] QSC 99 There is a conflict of interest which arises when a legal personal representative is also the sole beneficiary under a nonbinding death benefit nomination, which highlights the importance once again of dealing appropriately with superannuation proceeds as part of your estate planning. In McIntosh v McIntosh [2014] QSC 99, it was held that the administrator of a deceased estate was in breach of her fiduciary duties because she did not take active steps to have the deceased s superannuation death benefits paid to the estate, instead preferring her own interests by applying to the superannuation funds to have the proceeds paid to her personally as a dependant of the deceased. In the absence of a binding death benefit nomination, the trustee of a deceased s superannuation fund has discretion to pay the death benefits to the deceased s estate or to his or her dependants. The court held that while the discretion lies with the trustee, the deceased s legal personal representative has a duty to call on the trustee to exercise it. Facts The deceased died intestate at the age of 40. He was not married and at the time of his death he lived with his mother who cared for him as he suffered from bipolar disorder. The deceased s parents separated when he was very young and the deceased had lived with his mother for most of his life. The deceased s mother successfully applied to be appointed as the administrator of her son s estate, which had about $80,000 worth of assets in it. Under the intestacy rules, the deceased s estate would be divided equally between his parents. The deceased also had three superannuation accounts, the death benefits of which totalled just over $453,000. The deceased had made nonbinding death benefit nominations for each fund in favour of his mother. The deceased s superannuation benefits did not automatically form part of his estate. Following her appointment as administrator, the deceased s mother successfully applied to each of the superannuation funds to have all of her son s death benefits paid to her personally on the basis that she was in an interdependency relationship with him. In response to enquiries from the deceased s father s solicitors regarding superannuation, the deceased s mother s solicitors stated that as it did not form part of the estate, their client was not required to account to the estate for it. Following further correspondence from the father s solicitors, the mother applied to the court for a declaration that she was entitled to receive the superannuation death benefits personally, and that she was not required to account to the estate for them. The court disagreed. Findings Atkinson J held that in applying to have the death benefits paid to her personally, the deceased s mother had breached: (a) her duty under section 52(1)(a) of the Succession Act 1981 (Qld) to collect and get in the real and personal estate of the deceased and administer it according to law; and (b) her fiduciary duty as the administrator of the deceased s estate to avoid a conflict of personal interest and duty occurring. The court held that an administrator of an intestate estate has a duty to apply for payment of superannuation benefits to the estate. In the absence of a binding death benefit nomination, the trustee of a deceased s superannuation fund has discretion to pay the death benefits to the deceased s estate or to his or her dependants. The court held that while the discretion lies with the trustee, the deceased s legal personal representative has a duty to call on the trustee to exercise it. 13 HOPGOODGANIM LAWYERS

14 The deceased s mother was ordered to pay all of the proceeds of the superannuation death benefits to the deceased s estate for division in accordance with the intestacy rules, which in this case, was equally between herself and the deceased s father. Importantly, the court has provided some clarity on conflicts by drawing a distinction between: (a) where a testator appoints an executor under his or her Will and that person is also the sole beneficiary under a non-binding death benefit nominations; and (b) where the deceased dies intestate and a person who is the sole beneficiary under a non-binding death benefit nominations voluntarily applies to become the administrator of the deceased s estate. In the first situation, it is considered that the testator has appointed the executor knowing that there will be a conflict between the executor s duties and his or her personal interests, and accepting that conflict. The exception does not however extend to the second scenario where a person voluntarily puts himself or herself into a new position of conflict. This conflict of interest which arises when a legal personal representative is also the sole beneficiary under a non-binding death benefit nomination, highlights the importance of dealing appropriately with superannuation proceeds as part of your estate planning. The conflict of interest in this case would have been avoided if the deceased had nominated his mother as the sole beneficiary under a binding death benefit nomination, rather than a non-binding death benefit nomination. It would also have been avoided if the deceased s mother had not applied to be appointed as the administrator and had only applied for payment of the superannuation proceeds. Irrespective of a conflict, a legal personal representative should apply to have the deceased member s death benefits paid to the estate to maximise the amount for distribution to the beneficiaries. If for any reason that application is not made, the deceased s death benefit will not form part of the estate and the legal personal representative maybe in breach of their duties. If the deceased had made a BDBN in favour of his mother personally, the dispute would not have arisen. Similarly, the outcome would likely have been different had the deceased executed a Will appointing his mother as his executor. BRINE V CARTER [2015] SASC 205 Similar issues arose in the more recent decision of Brine v Carter [2015] 205. Facts In that case, Professor Brine was survived by his de facto partner, Ms Carter, and his three adult sons from a previous relationship. Professor Brine s Will appointed Ms Carter and his sons as the joint executors of his estate. In his Will, Professor Brine provided a life interest to Ms Carter in his principal place of residence and another residence, and gave the rest of his estate to his sons and grandchildren. Professor Brine had two superannuation accounts with UniSuper exceeding $630,000. One was an indexed pension annuity, which he nominated his de facto spouse to receive. The second was an accumulation account, which was able to be paid to the spouse, children or estate of Professor Brine. Rather than making a BDBN in relation to the accounts, Professor Brine had written to UniSuper expressing his wish for the beneficiary of the accounts to be his estate. This was recorded with UniSuper, however, given its form, was unenforceable. Following Professor Brine s death, Ms Carter made applications to UniSuper to have the balance of each account paid out directly to her as Professor Brine s surviving spouse. For some months, Ms Carter failed to disclose the extent of the superannuation benefits to Professor Brine s three sons, in circumstances where they were potential beneficiaries of the accumulation account. Once the sons became aware of the super and their potential claim, they claimed the benefit as executors of the estate. Nevertheless, UniSuper exercised its discretion in favour of Ms Carter. The children executors then sued Ms Carter for breach of her fiduciary duty and sought orders for her to account to the estate, as in the decision of McIntosh. Findings The court determined that although Ms Carter was strictly in breach of her fiduciary duty, she was not required to account to the estate because she was ultimately authorised by the other executors. The court found that at the date the sons lodged their competing claim with UniSuper, they were aware of all the relevant facts and circumstances. By their conduct they had thereby consented to Ms Carter pursuing her own interests in claiming payment of the benefit in her personal capacity, without being obliged to resign as an executor of Professor Brine s estate. However, the outcome would have been different had the executors remained ignorant of the true position and UniSuper decided to pay the superannuation to Ms Carter in the absence of any competing contention in favour of the estate. Ultimately however the court considered that, notwithstanding Ms Carter s behaviour, there was no causal connection between her application and the ultimate outcome. The Court commented: UniSuper gave no consideration to the exercise of its discretion until it had received the competing contentions from Ms Carter on the one hand and the other three executors on behalf of the estate on the other hand In these circumstances, there was no connection between Ms Carter s breach of duty and the benefit she received. Nevertheless, if no competing contention had been advanced on behalf of or in favour of the estate, equity would not have enquired into the prospect that the discretion would have been exercised in favour of the estate and Ms Carter would have been liable to account. This dispute could have been avoided if Professor Brine had executed a valid BDBN as part of his estate planning. Challenges to payments of death benefits We ve already seen challenges to payments for death benefits on the basis of the following: 14 HOPGOODGANIM LAWYERS

15 1. Form or content of a binding death benefit nomination; 2. Control of trustee where no binding death benefit nomination; and 3. No estate planning or inadequate or inappropriate estate planning. I think we will continue to see cases challenging the form and content of binding nominations and as a result of inadequate or inappropriate estate planning. I predict an increase in challenges as a result of inadequate or inappropriate estate planning and the reason for my prediction is the significance of the changes brought in at 1 July There are many do it yourself selfmanaged fund trustees and members and the introduction of the transfer balance cap had significant impacts on estate planning in superannuation and coupled with increasingly complex family dynamics members and trustees are bound to come unstuck. SOLUTIONS The benefit of hindsight is a wonderful thing and in many of the cases the solution appears very simple. To ensure members death benefits are paid where they intend, they should: 1. Get good holistic advice, regularly. It s not set and forget. Member s should introduce their lawyer, their accountant and their financial adviser and have them all working together; 2. Read the deed and then comply with it; and 3. Superannuation death benefit advice is part of an estate plan, don t prepare any of these: Will, a EPA, a BDBN or a reversionary beneficiary nomination in a vacuum; ESTATE PLANNING Having a comprehensive estate plan enables members to have a plan B. Regardless of whether direct control measures have been implemented, it will be necessary to ensure that the client s Will is consistent and complimentary to their overall estate planning strategy. If there is a corporate trustee of an SMSF, then you should consider including in the member s Will a specific gift of the shares to the surviving spouse, or the executors, depending upon who the member wishes to control the trustee company upon their death. Commonly Wills will contain power for the executor to appropriate particular assets to the beneficiaries. However where there is a possibility of superannuation death benefits being paid to the estate, it is wise to consider including a more specific power of appropriation in relation to superannuation death benefits, to those beneficiaries who are also Tax Act dependants. Particularly where a member has both Tax Act dependants and non-tax Act dependants, a specific appropriation clause will ensure that the executors have the flexibility to direct death benefits to Tax Act dependants, in consideration of their entitlement under the Will, and this will minimise the tax payable by the estate. If however there is a possibility that superannuation death benefits will be paid directly to the intended beneficiaries (whether they are Tax Act dependants or not), and whether because there is a BDBN in place, or as a result of the trustee s decision, you may also need to consider the inclusion of an equalisation or adjustment clause in the Will, which will ensure the beneficiaries receive the intended proportion of the deceased s entire wealth, whether as a distribution or gift under the estate or direct from superannuation, or some other non-estate entity. Adjustment clauses deal, not only with the superannuation but other non-estate assets, and in effect seek to impose a division of the deceased s total wealth in the proportions set out in the Will, even though as we have already covered, a Will cannot make binding directions in relation to the non-estate assets. Adjustment provisions operate as follows: directs the executors to ascertain a value of the deceased s total wealth that is the value of the residuary estate and also the non-estate assets listed in the Will; the executors then calculate the beneficiaries entitlement of total wealth based on the proportions set out in the Will; the executors then deduct from that entitlement, any amounts already received by the beneficiary from the non-estate assets (this may include any superannuation paid directly from a super fund to the beneficiary; any amount of the beneficiaries entitlement to the total wealth, not paid from non-estate assets, will then be paid to the beneficiary from estate assets. Any adjustment provision must be tailored with the specific client s circumstances in mind, and most importantly consideration must be given to whether there are sufficient personally owned assets, forming part of the estate to be available to adjust or balance up the inequality arising from beneficiaries receiving nonestate assets. For example, if the client s superannuation death benefits are $750,000.00, and the deceased s only other asset is a house worth $250,000.00, regardless of how well drafted the adjustment provisions in the Will are if the superannuation is paid directly to one of only two children of the deceased, there will be insufficient estate assets to rectify this inequality. 15 HOPGOODGANIM LAWYERS

16 Tips and examples TIP ONE - BINDING DEATH BENEFIT NOMINATIONS ARE NOT MANDATORY If you don t need one don t have one or you might be causing a problem. A deceased had made a simple Will, containing no testamentary trusts and no adjustment provisions. It appointed her two adult children as the joint executors and equal beneficiaries. The deceased s two major assets were her family home and her superannuation balance held in an SMSF. The children of the deceased agreed that one child would receive the deceased s home and a small proportion of proceeds of the superannuation in consideration of their equal share and the other would receive the majority of the proceeds from the superannuation in consideration of their equal share. This arrangement would have been achievable without payment of stamp duty, but for the fact that the deceased had a valid BDBN compelling the trustee of the SMSF to pay the proceeds of superannuation directly to her two children in equal shares. Having the BDBN in place in this circumstance cost the child wanting to retain the deceased s home approximately $20,000 in stamp duty and transfer costs. Without a BDBN the executors acting as the LPR of the deceased member could have appointed themselves as the trustees of the SMSF and using their discretion paid the death benefits to the estate of the deceased, thereby increasing the asset pool of the estate to a level sufficient to allow an appropriation of the deceased s family home to one child in consideration of their benefit under the Will and consequently without stamp duty and additional transfer costs. TIP TWO A WILL DOES NOT DETERMINE PAYMENT OF SUPERANNUATION DEATH BENEFITS If you are going to deal with superannuation in the Will you need to be certain the superannuation will be paid to your estate. Caitlin is married to Gary. Caitlin and Gary are the members and trustees of their SMSF. Caitlin has a son, Ben (37), from a prior marriage. Caitlin has made a non-binding nomination to the effect that her superannuation is to be paid to her LPR and form part of her estate. In Caitlin s Will she specifies that her entire estate (including superannuation) is to be split equally between Gary and Ben. Because the nomination is not binding, Gary as the trustee of the SMSF is entitled to disregard it. He is entitled to exercise his discretion and pay 100% of Caitlin s superannuation benefits to himself. This means that Gary will receive 100% of Caitlin s superannuation, instead of it being split 50% to him and 50% to Ben as provided for in Caitlin s Will. TIP THREE IT S COMPLICATED AND FLUID, SO GET ADVICE AND REVIEW OFTEN The facts: Paul is married to Hannah. Hannah has a daughter, Vanessa (28), from a previous marriage. Paul and Hannah have three sons, Joseph (16), John (15) and Jeremy (13). Paul and Hannah have a SMSF. Paul would like advice as to best split his large superannuation balance. He is concerned about the following: minimising any possible taxation payable; ensuring that any payments made (particularly to his younger children) cannot be all spent at once; and equally splitting his superannuation benefits between his wife and his four children. Possible options: Reversionary pension? Paul cannot commence a pension just yet but may be an option in 5 years time. But bear in mind the $1.6 million transfer balance cap. BDBN? 1/5th to Hannah as a pension (tax free); 1/5th to Vanessa lump sum (taxable); 1/5th to Joseph pension (tax-free); 1/5th to John pension (tax-free); 1/5th to Jeremy pension (tax-free). But again, bear in mind the $1.6 million transfer balance cap. Straight to the estate? Adjustment clause; Superannuation proceeds trust. 16 HOPGOODGANIM LAWYERS

17 Contact Laura Hanrahan Senior Associate P E l.hanrahan@hopgoodganim.com.au About HopgoodGanim Lawyers HopgoodGanim Lawyers is a full service commercial law firm. Our firm has 42 partners and more than 270 staff. We operate nationally and internationally with a focus on Asia from our two key locations of Brisbane and Perth. We offer highly skilled and agile legal teams across key sectors and areas of practice. In all of our areas of speciality, our lawyers are recognised by legal publications as leaders in their fields. The service we provide to our clients is second to none. We deliver a consistently high level of client service and our commitment to this was recognised when HopgoodGanim was named the Best Law Firm in Australia ($50m - $200m revenue category) at the 2015 Financial Review Client Choice Awards. We were also named the Best Professional Services Firm in Australia ($50m - $200m revenue) in the same year and the Best Queensland Professional Services Firm in Legal Areas of Practice CORPORATE AND COMMERCIAL LAW Banking and Finance Capital Markets and M&A Commercial Property Corporate and Commercial Advisory Competition and Trade Practices Construction Employment Health and Safety Information Technology and Data Protection Insurance Insolvency Intellectual Property Litigation and Dispute Resolution Manufactured Homes Native Title Planning and Environment Resources and Energy Taxation PERSONAL AND FAMILY LAW Estate Planning Estate Litigation Family and Relationship Law Taxation Industry Sector Focus Agribusiness and Food Banking and Financial Services Government Hospitality, Entertainment, Sport Private Enterprise Real Estate Resources, Energy, Projects Technology, Media, Communications They re prompt, have real expertise, offer practical advice and are cost conscious. (an anonymous Client Choice Awards survey respondent, 2015) 17 HOPGOODGANIM LAWYERS