Self Managed Super Funds (SMSF) are an increasingly popular form of retirement fund, and one of the fastest growing sectors. They offer a high level of flexibility and allow members a wider range of investment possibilities and a greater level of control over their retirement benefits.
However, as with any family arrangement, a SMSF can give rise to uncertainty in how benefits will be paid and create disputes between family members if appropriate care is not taken.
Superannuation benefits usually pass as follows:
- In accordance with a binding death benefit nomination;
- If there is no binding death benefit nomination, in accordance with the trustee’s discretion; and
- If the trustee does not exercise his or her discretion, in accordance with the rules of the fund.
A recent decision handed down by the Supreme Court of Western Australia emphasises the importance of ensuring that you have a current binding death benefit nomination in place.
Ioppolo & Hesford v Conti [2013] WASC 389 concerned a dispute regarding the distribution of a deceased member’s interest in her SMSF. Mrs Conti and her husband, the first defendant, had created a SMSF by deed in 2002. The couple were the only trustees and members of the SMSF. Mrs Conti then made a Will in 2005 in which she directed that her children receive her entitlements under the SMSF. She specifically stated that she did not want her husband to receive those funds.
When Mrs Conti died in 2010, she did not have a current binding death benefit nomination. Her husband became the only trustee and member of the SMSF. By deed of appointment in 2011 a company, the second defendant, was appointed trustee of the SMSF. The second defendant disregarded the direction in Mrs Conti’s Will and determined that her entitlements should be paid to her husband, a determination that her children, the plaintiffs, then challenged. Their relevant arguments were, firstly, that the first defendant was obliged to appoint one of the executors of Mrs Conti’s estate as trustee of the SMSF; secondly, that the second defendant did not exercise its discretion in good faith; and thirdly, that the trustee’s determination should be reviewed and overturned
In finding against the plaintiffs, the court held that:
- The first defendant was entitled but not bound to appoint an executor as trustee.
- The second defendant was entitled but not bound in any way to take into account the desires of a deceased member, even if those desires were expressed in a Will.
- The second defendant did not act improperly by ignoring Mrs Conti’s Will, and the mere fact that her direction was ignored did not equate to a lack of good faith.
- In the absence of a binding death benefit nomination, the defendants acted properly, and there could be no review of their determination to pay Mrs Conti’s entitlements to her husband.
This decision serves as another reminder that superannuation is a non-estate asset that does not automatically pass in accordance with the Will of a member. Therefore a current and valid binding death benefit nomination is crucial to ensure that your benefits pass to your intended beneficiaries.
The case is not ground-breaking; in 2005, the Supreme Court of New South Wales made a similar decision in Katz v Grossman, finding against a plaintiff who alleged an improper exercise of power by the trustee of a SMSF. This case involved a contest between two siblings in relation to the control of a SMSF established by their late father, Mr Katz. Mr Katz had made a non-binding death benefit nomination indicating that he wanted his benefits to be split equally between his two children. When he died, his daughter (Mrs Grossman) became sole trustee and quickly appointed her husband as additional trustee. As trustees of the SMSF they disregarded the non-binding nomination and paid 100% of Mr Katz’s benefits to Mrs Grossman. Although Mr Katz’s son challenged this exercise of discretion, Mrs Grossman and her husband had acted properly as trustees and were entitled to disregard the non-binding nomination.
Chamberlains Private Wealth provides the following checklist for SMSF trustees and members to ensure that their benefits pass to their intended beneficiaries:
- Review your SMSF deed to ensure that trusteeship automatically passes to your executor or legal personal representative. Ioppolo & Hesford v Conti [2013] makes it clear that this does not automatically happen;
- Ensure that your SMSF deed allows for binding death benefit nominations;
- Ensure that your SMSF deed allows for death benefit nominations that do not lapse (some deeds still state that nominations will lapse every 3 years);
- Complete a binding death benefit nomination and ensure that you review it on a regular basis;
- Seek estate planning advice to ensure that your SMSF deed and estate planning documents do not conflict.
