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Recent Court decisions highlight the necessity of coordinating your Estate Plan with the ongoing con

Australians have embraced the Self-Managed Superannuation Fund ("SMSF") as a vehicle to create wealth and provide for their own retirement. Current ATO statistics reveal that there are approximately 598,400 SMSF in Australia with a total membership of 1,129,542 controlling an estimated to be $747 billion of assets.

Unfortunately, many SMSF members do not fully appreciate the interaction between their interest in the super fund and their Estate. In particular, how they should provide for the ongoing control of the SMSF after their passing whilst also ensuring that the fund Trustee pays their interest, or death benefit, in the way the member intends. Disputes involving SMSF in deceased estates are becoming more frequent, with a common feature being a failure to properly provide for the appointment of the deceased upon passing and ensuring there is a valid and effective BDBN in place.

Recent decisions in the Courts highlight the necessity of coordinating a deceased member's Estate Plan with the ongoing control of the super fund and the payment of the deceased member's interest. The decision of the Supreme Court of Western Australia in Ioppolo & Hesford v Conti [2013] WASC 389 is a salutary tale of inconsistent decision making and unintended outcomes.

The Facts

A married couple were the sole members and trustees of a SMSF which was established in 2002. The terms of the SMSF Deed:

  1. Provided that, in the absence of a binding written direction from a deceased member, the trustee of the fund has an absolute discretion to pay the deceased member's death benefit to a spouse, child or dependent of the trustee's choosing.

  2. Required the Trustee to act "bona fide" in exercising its discretion to pay the death benefit.

The wife's Will expressed her intention that, upon her death, her interests in the super fund should be paid to the four children of the marriage and that nothing should be paid to her husband.

The wife passed away without leaving a current binding written direction to the SMSF trustee. However, she had previously given two written directions to the trustee directing that her death benefit be paid to her husband. Both of those written directions had lapsed by the time of her death and were ineffective, but they were still matters the trustee was entitled to have regard to when determining to whom the death benefit ought to be paid..

From the date of the wife's death the husband was the sole trustee of the SMSF. He subsequently appointed a corporate trustee, which he controlled, and then determined to pay all of his deceased wife's death benefits to himself and not to her children as provided in her Will.

The matter did not end there because the wife's Will appointed two of her daughters as her executors and they promptly commenced proceedings against their father arguing that:

  1. he was required by both the governing legislation and the SMSF Deed to appoint one of the executors as trustee of the SMSF so that it would remain a "complying SMSF" for tax purposes;

  2. because he had not acted in accordance with the terms of the Will he was not acting in a "bona fide" way as required by the SMSF Deed;

  3. one of the executors should be appointed as a Trustee of the SMSF; and that

  4. there should be a review of the exercise of the Trustee's discretion to pay the death benefit to the husband.

The Decision

The Court's decision was that the daughters' application should be dismissed in its entirety because:

  1. The direction in the Will was not binding on the Trustee and, in the absence of a current written binding direction under the SMSF Deed, the Trustee could have regard to the lapsed directions in deciding to whom the death benefit should be paid. Not following the non-binding direction in the Will was not evidence of a lack of bona fides.

  2. The Trustee had taken expert advice as to the exercise of its discretion and who was entitled to be paid the death benefit. After obtaining and acting on expert advice it could not be said that the husband was not acting bona fide.

  3. Given that the husband and his daughters were in direct conflict as to the payment of the death benefit and the administration of the SMSF, it would be disastrous to appoint one of the executors as a trustee of the fund.

  4. A court will only review the exercise of a trustee's discretion in very limited circumstances and, in the circumstances of this case, there were no grounds whatsoever to review the trustee's decision.

The Lesson to be learnt

The discretion of an SMSF trustee to pay a death benefit cannot be bound by testamentary wishes in a Will. In the absence of a binding death benefit nomination pursuant to the SMSF Deed, a Trustee has an unfettered discretion to pay a deceased member's death benefit to any eligible beneficiary. A Trustee will not breach its duties if it pays such death benefit in a manner contrary to the testamentary wishes of the deceased member.

The Executor of a deceased member's estate does not have an automatic right to be appointed as a trustee of the SMSF.

Poor estate planning can lead to catastrophic outcomes, often pitting family members against each other. The outcomes are often substantially different from what the deceased intended, leaving a trail of legal bills and permanently damaged family relationships in their wake. If you are a member of an SMSF you should ensure that:

  1. Your SMSF Deed is current and provides for the making of non-lapsing binding death benefit nomination.

  2. The binding death benefit nomination is given to the SMSF trustee.

  3. The terms of your Will and the other documents giving effect to your estate plan are consistent.

  4. You get and act on expert advice.

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