Phil Broderick, principal for Sladen Legal, told delegates at the SMSF Adviser Technical Strategy Day that one of the biggest problems with BDBNs is that they are defective from the outset.
“This always happens because someone’s often used a pro-forma document that they’ve got off the internet, or ChatGPT or some service provider, which all looks good, but then you go to the trust deed, and the trustee has codified certain provisions which the BDBN doesn’t follow,” Broderick said.
He explained that it wasn’t until the 2010s that courts started to see situations where people actually prepared BDBNs, and there was a “bit of looseness” around them and how they were prepared.
“There are four main ways we’ve seen evolve in how death benefits have been challenged, and it’s really important if we want to ensure we don’t have such challenges in the future that we learn lessons from court cases and put in place death benefit documentation, or make death benefit decisions in a way that prevents challenges.”
Broderick explained that the four ways – or frontiers – of challenge include control cases, BDBN challenge cases, conflict of interest cases, and discretion challenge (claim staking) cases.
He said the first step with any BDBN is to always check the deed, to ascertain the requirements and ensure they match.
“It might have a particular form that you have to use, although that is becoming rarer. It might have witness requirements.”
“If a deed is very prescriptive, and there’s lots of things that could go wrong, you may want to update it, or use a new deed provider that has less restrictions which is the more modern way of drafting these things.”
If using a power of attorney, Broderick said it is best practice to see if the deed allows them to make BDBNs, and whether it codifies it one way or another, which depending on the estate might be very important.
“A lot of these powers of attorney are just normal powers of attorney and [you have to consider whether] it is really appropriate to give that person that power,” Broderick said.
“If you need a power of attorney and decide to choose, say your daughter, and the trust deed empowers a POA to make BDBNs, then all of sudden you have given your daughter the power to make a BDBN in her favour.”
Broderick said he always recommends that it be put in a power of attorney that the individual either has the power to make BDBNs or doesn’t.
“You can take the middle ground, which states they have got the power to make a BDBN but only if it’s in the favour of a spouse or the estate.”
“Then they don’t have the power to benefit themselves. So again, just check if you are required to service the BDBN or not, and particularly for those clients who want to make a BDBN which is not for their spouse. If they want to do that, then they’ll need to update the deed.”
Broderick said there are ways to minimise challenges to a BDBN, including having a deed that does not require the service of BDBNs to the SMSF trustee(s) or registered office of the corporate trustee.
“You can also have the SMSF trustee(s) sign off on the BDBN as having accepted it and importantly get the control of the SMSF right.”
“The person who will receive the benefits should control the SMSF. Also, have an independent executor. If you know who is to receive the death benefits do a BDBN, but make sure you prepare it correctly. Finally, make sure your super death benefit planning is consistent with your broader estate planning. Where appropriate, authorise conflicts of interest, and if you have a conflict of interest, consider that before you make a death benefit claim.”
