Leaving Your Super to Beneficiaries: Proceed with Caution

Binding death benefit nominations, or BDBNs, have been part of the superannuation landscape for quite some time – but not all have worked as intended.

Overcoming problems with leaving your super money after your death

The most common theme from the cases detailed is the incorrect assumption that the will of an individual can direct the distribution of superannuation benefits.

The other theme that was dealt with in some cases was the invalidity of BDBNs, whether through lapsing due to time, incorrect linking to the Super Industry Supervision (SIS) Act provisions, or incorrect nominations.

Some ways potential problems may be overcome, include:

• Ensuring the trust deed of the Self Managed Super Fund (SMSF) is current and any BDBN is prepared in accordance with provisions contained in that deed;
• When updating the trust deed, ensuring the provisions of the new deed provide for a BDBN prepared under the earlier deed;
• Ensuring the trust deed provides directions as to which document will take precedence in the event of any potential conflict between a BDBN and other death benefit documents, particularly a pension reversion nomination and a death benefit rule.

Advisers and members should also consider the viability of appointing a death benefit guardian – someone who must approve the decision of the SMSF trustee to pay benefits in the event that there is no valid BDBN or other document directing the payment of death benefits of a member.

What has gone wrong in the past?

Since the introduction of the SIS Act, many BDBNs have successfully directed death benefits of deceased members to those nominated to receive benefits. However, not all have gone according to plan, as a growing list of legal cases indicates. Additionally, it could be expected that for each case that reaches court, a number of disputes:

• Will be settled out of court, or
• May be dropped due to the cost of taking action.

Katz vs Grossman

This case highlighted the need for a BDBN, that is, that a super trustee deciding can have unintended effects. Mr and Mrs Katz were trustees of their SMSF:

• Following the death of Mrs Katz, their daughter, Linda Grossman, was appointed as second trustee;
• Mr Katz passed away (in his will he appointed his daughter and son as executors, leaving his estate to both equally);
• Linda appointed her husband as the second trustee;
• Mr Katz had not left a BDBN so the trustees distributed all the benefits to Linda; and
• Her brother, who was not left a share by the trustee, took action to claim a share of the benefit.

The action failed because the trustees were not in breach of the provisions of the trust deed.

Had Mr Katz left a valid BDBN directing the benefits equally to both children, Mr and Mrs Grossman could not have made the decision they ultimately made.

Donovan vs Donovan

This case highlighted the need to ensure a BDBN is prepared correctly and as per the deed’s requirements. In other words, the BDBN failed because the trust deed linked it to the requirements in SIS. Since the BDBN was not prepared in accordance with those requirements it failed.

Loppolo vs Conti

This case shows that even with a will, without a BDBN the wishes of the deceased regarding their super money may not be followed.

Mr and Mrs Conti were trustees of their SMSF;

• Mrs Conti, in her will, appointed her daughters as executrices and directed;
• Her superannuation to her daughters; and
• Mr Conti receive no superannuation benefits.
• Mrs Conti passed away, leaving Mr Conti as the surviving trustee.

Mr Conti:

• Appointed a corporate trustee – he was the sole director; and
• Distributed Mrs Conti’s benefits to himself.

In that case, the daughters launched action on two fronts, that:

• They be appointed trustees of the SMSF (presumably to stop Mr Conti from acting as he did); and
• Mr Conti had not acted in a bona fide manner (a requirement in the trust deed) in providing the benefits to himself.

The action by Mrs Conti’s daughters failed on both matters, the court ruling Mr Conti had acted in a bona fide manner and in accordance with the trust deed.

Wooster vs Morris

This case shows BDBNs are enforced by the courts.

Mr and Mrs Morris were trustees of their SMSF;

• Mr Morris made a BDBN directing his superannuation to his daughters;
• The SMSF trust deed directed that the BDBN be ‘given’ to the trustees;
• As the BDBN had not formally been presented to Mrs Morris, she sought legal advice as to the validity and was advised there was a chance it may be valid; and
• Mrs Morris paid the benefits to herself.

A court-appointed referee determined the BDBN was valid and binding, so the superannuation death benefits of the deceased were to be paid to the daughters.

Ref: Michael Harkin, (BDBNs: where does it all go wrong? SMSF Adviser, November 2015)

Ascendia Law provides comprehensive estates and superannuation law advice and services. Contact Natalie Grima on natalie.grima@ascendia.com.au or on 07 5444 0905.