UNDERSTANDING (SUPERANNUATION) HEAVEN AND HELL. BRYCE FIGOT Director DBA Lawyers

Transcription

1 UNDERSTANDING (SUPERANNUATION) HEAVEN AND HELL BRYCE FIGOT Director DBA Lawyers

2 Current legal nature of super

3 Current legal nature of super What is the true current legal nature of super? Peter Bobbin makes strong case that it is vested in interest and it belongs to the person in whose name it is credited, it is simply not capable of personal possession by them

4 Risks and exposures

5 The risks and exposures Case study SMSF member wants death benefits to go to daughters Adviser tells member way to achieve this is to make a BDBN in favour of daughters Does the adviser have any exposure? Member makes a BDBN in favour of daughters Member dies Who gets the money? Consider Wooster v Morris [2013] VSC 594

6 Wooster v Morris [2013] VSC 594 Disclaimer: DBA Lawyers advised the plaintiffs during the course of litigation We only mention facts made publicly available in the judgement

7 Wooster v Morris [2013] VSC 594 married Mr Maxwell Morris Susan Wooster Mrs Patricia Morris BDBN to daughters Mr Morris children from previous marriage Executors under Mr Morris will Kerryn Smoel SMSF: Morris Family Superannuation Fund Sole director & shareholder T: Mr Upper & Mrs Swan Morris Noms P/L M:Mr & Mrs Morris Legal advice: BDBN defective 24/08/2005 : SMSF established 18/03/2008: BDBN made by Mr Morris in favour of his daughters in respect of all of his interest in SMSF 08/04/2009: Mr Morris makes will 27/02/2010: Mr Morris dies 18/08/2011: Upper Swan Noms Pty Ltd appointed trustee 18/08/2011: Trustee makes resolution accepting legal advice be accepted that BDBN not binding All of Mr Morris benefits transferred and divided between accounts held in name of Mrs Morris

8 Wooster v Morris [2013] VSC 594 What options might be open to plaintiffs (ie, Mr Morris daughters)? They commenced proceedings seeking declaration that BDBN valid and binding Matter was referred to a Special Referee Special Referee found: BDBN was valid and binding and that the [daughters] were entitled to be paid the value of the deceased s interest in the MFSF, namely $ , together with statutory interest accruing on that sum from 30 June What happens then?

9 Wooster v Morris [2013] VSC 594 Trustee paid daughters $ Therefore, $ still owing plus: interest legal costs SMSF looked as follows: Benefits left in Mr Morris name Benefits in Mrs Morris name $75,711 $477,992 Total assets in SMSF: $553,703

10 Wooster v Morris [2013] VSC 594 McMillian J noted that: The draft financial accounts for 2013 of the MFSF record legal fees of $ and accountancy fees of $ paid from the deceased s account for the year ended 30 June 2013

11 Wooster v Morris [2013] VSC 594 Mrs Morris and trustee [ie, defendants] argued: any orders made in the [daughters ] favour can only be satisfied to the extent of the amount now standing in the name of the deceased in the accounts of the MFSF [ie, $75,711] McMillan J held: the orders made against the MFSF should come out of the fund as a whole, not just the interest of the deceased Is director of Upper Swan (Mrs Morris) also personally liable? Generally no However: The [daughters] also submit that, in some circumstances, a Court can order costs to be paid by a non-party where the considerations of justice demand it. McMillan J held: In my view, Mrs Morris substantial financial interest in the outcome and the lack of concern for the other beneficiaries in making the decision to defend proceedings mean it is fair that, if Upper Swan is unable to pay all of a costs award made against it, it should fall upon Mrs Morris, in her personal capacity, to meet any shortfall.

12 Wooster v Morris [2013] VSC 594 Can Upper Swan and/or Mrs Morris claim right of indemnity for its costs as trustee out of MFSF? Daughters argued no: [daughters] submit that the defendants took steps to act in a way designed to benefit Mrs Morris as trustee, co-trustee or sole director and shareholder of the trustee to the detriment of the plaintiffs McMillan J held: There is no doubt that the defendants HAD a right of indemnity out of the MFSF In my view, [Mrs Morris and Upper Swan] have lost their right for indemnity by acting a manner designed to benefit Mrs Morris as trustee, co-trustee and sole director and shareholder of Upper Swan. The right of indemnity does not apply to both their own costs and the costs of the [daughters] for this proceeding.

13 Wooster v Morris [2013] VSC 594 So Mrs Morris personally liable for the shortfall In a later judgement (Morris v Smoel [2014] VSC 31), McMillan J noted: Mrs Morris died on 24 September 2013 To the extent that the [daughters] are unable to recover the amount due to them from the Morris Family Superannuation Fund, the shortfall was ordered to be paid by the estate of Mrs Morris. the shortfall will not be recovered by the [daughters]... [Mrs Morris ] estate intended to file for bankruptcy.

14 Wooster v Morris [2013] VSC 594 Lessons from Wooster v Morris: A valid BDBN does not necessarily mean that the right people will get death benefits in efficient and timely fashion BDBNs are only a partial solution at best An adviser can not simply tell client to make a BDBN and expect that succession planning is handled What really matters is the identity of who is holding purse strings That is, who will be trustee upon death What exposures might exist for advisers under: common law negligence (Hill v Van Erp [1997] HCA 9) s 55 of the SISA and other relevant areas?

15 What can be achieved?

16 What can be achieved? Focus on control Who will be controlling SMSF upon death or loss of capacity? Depends to a large degree on deed What about the following perennial situation: Non-commutable pension to second spouse and upon second spouse s death, capital to children from previous marriage

17 What can be achieved? married (second spouse) SMSF Mike B Carol Mike s children from previous marriage Mike wishes that when he dies: Carol receives his SMSF benefits by way of non-commutable pension then when Carol dies capital to his children from previous marriage Can Mike s wish be achieved? Greg Peter Bobby

18 What can be achieved? Possible difficulty: When Carol is receiving Mike s death benefits as noncommutable pension, is Carol a member? Yes, s 10(3) of SISA provides: Without limiting the meaning of the expression member in this Act, that expression, in relation to a self managed superannuation fund, includes a person: (a) who receives a pension from the fund; If Carol is member, who must be trustee/director in order for fund to be an SMSF? Carol that is, Carol is holding purse strings In practical sense, what stops her withdrawing all capital?

19 What can be achieved? What alternate ways exist to try to achieve this goal? What if a SAF is used instead of an SMSF?

20 What can be achieved? Mike B married (second spouse) Carol Mike s children from previous marriage SMSF SAF When Mike dies and if Carol is very healthy and outlives Mike by 30 years who does the SAF show as being the member? Greg Peter Bobby

21 Other strategies

22 Other strategies ALTERNATE STRATEGY 1: Ensure money forms part of estate Ensure terms of will provide that: Someone trustworthy is controlling things Money paid from super to estate is held on trust Income beneficiary is second spouse Capital beneficiaries upon second spouse s death are children from previous relationship What are some dangers of utilizing the estate? Consider facts of Morris v Smoel [2014] VSC 31 and Morris v Smoel [2014] VSC 32

23 Other strategies ALTERNATE STRATEGY 2: Remove assets from SMSF during life Settle asset in a standard discretionary trust Ensure trustee is someone completely trustworthy Disadvantages in doing this?

24 Other strategies ALTERNATE STRATEGY 3: If fully trust person controlling SMSF upon death, why even bother with BDBN? That is, ensure someone trustworthy is running fund and leave to their discretion If so, beware the tenth circle of hell: thinking an absolute unfettered discretion is just that

25 The final circle of SMSF hell: unfettered discretion

26 Avoiding SMSF hell: unfettered discretions Francesco is sole member of an SMSF Trusted adviser YOU is his executor Does this mean upon his death you automatically will be administering Francesco s SMSF? No However, if it occurs, fund will probably still meet definition of SMSF (SISA s 17A(3)(a)) Francesco dies Due to governing rules, you become trustee

27 Avoiding SMSF hell: unfettered discretions Side questions: Could you ever be personally liable for SMSF debts? Yes even with a corporate trustee A director is liable if: company acts as trustee company can t pay liability AND company not entitled to full indemnity out of trust assets due to company acting outside its trustee powers (CA s 197) Can you be remunerated for your work as trustee? No (SISA s 17A(2)(b) cf s 17B) Should you ever be LPR for a client? Possibly yes, but if an SMSF is involved, you d be doing it for love not money and probably with no PI insurance

28 Avoiding SMSF hell: unfettered discretions Back to Francesco What is the first thing you should do? Familiarise yourself with terms of trust (Hallows v Lloyd (1888) 39 Ch D 686) Specifically find: all trust deeds and any valid fetters (eg BDBNs) Assume governing rules give you an absolute and unfettered discretion to pay death benefits to any combination of following you think fit: dependants (eg, spouse, children of any age, financial dependants, etc) and/or estate (LPR)

29 Avoiding SMSF hell: unfettered discretions Francesco left behind: an estranged son (hasn t seen for years) a widow a daughter who is a single mother $2 million in super benefits What should you do? You decide to pay half to widow and half to daughter Who is upset by your decision? Can your decision be challenged?

30 Avoiding SMSF hell: unfettered discretions Pursuant to case law (Karger v Paul, Telstra Super v Flegeltaub and Finch v Telstra Super) trustee discretion liable to review if: Grounds 1 trustee gives reasons Unless governing rules require trustee to do so, no obligation to give reasons Why? nobody could be called upon to accept a trusteeship involving the exercise of a discretion unless he was not liable to have his motives or his reasons called in question either by the beneficiaries or by the court (In Re Londonderry s Settlement [1965] Ch 918 ) Should a trustee ever give reasons?

31 Avoiding SMSF hell: unfettered discretions Grounds 2 failed to act honestly and in good faith Grounds 3 failed to act upon genuine consideration, or acted in irresponsible or wanton manner Grounds 4 failed to exercise power with due consideration for proper purpose, or conversely exercised for some ulterior motive Grounds 5 no reasonable trustee could make such decision on material before it

32 Avoiding SMSF hell: unfettered discretions Practically, what to do? Courts focus on trustee actions and procedures not merits of conclusion What action or procedure should you follow? No prescribed method but remember: duty of trustees properly to inform themselves is more intense in superannuation trusts than in [discretionary testamentary trusts] (Finch v Telstra Super [2010] HCA 36 [66])

33 Avoiding SMSF hell: unfettered discretions Might consider following: Step 1 Trustee writes to all possible recipients asking: how much of benefits believe should be paid and in what form and why details of nature of relationship details of all people believe were living with Francesco upon death details of them including level of need, disabilities, earning capacities etc details of all people believe are children, spouses or otherwise dependent upon Francesco any other information feel relevant Step 2 determine proposed method of who/how to pay death benefit Step 3 writes to all possible recipients informing of proposed distribution and asking for feedback Step 4 determine a final method of who and how to pay the death benefit

34 Conclusion

35 Conclusion Control plays an absolutely critical role for succession planning Deed is vital Once in control, there can be unintuitive rules to remember: contesting estates exercise of unfettered discretions

36 Thank you Questions?