While binding death benefit nominations (BDBNs) can be an important tool for a member’s succession planning, they are still a relatively new legal instrument, with the law around it still continuing to develop and evolve over time. DBA Lawyers had noted that SMSFs can often run into numerous minefields that can upset a binding death benefit nomination and render it invalid.
Recently, the Western Australian Court of Appeal also handed down its decision in Hill v Zuda Pty Ltd [2021] WASCA 59. It provided a strong answer to the question of how long a binding death benefit nomination can last for in ALL Australian jurisdictions.
In a recent DBA Lawyers podcast, director Daniel Butler said that in Hill v Zuda, the Court of Appeal held that it is possible for an SMSF’s trust deed to be drafted to enable a binding death benefit nomination to last for more than three years and that this is the position in all Australian jurisdictions.
Given the outcome of this latest decision, Mr Butler noted that, from a legal perspective, SMSFs should consider reviewing their existing BDBN and revising that it is fit for current circumstances and to have it done on a quality deed.
“People really have to be mindful that you only really get one shot at this and that is before you pass away, and we never know the hour nor the minute this happens, it really is something we should attend to on a timely basis,” he said.
“I would be recommending advisers, particularly if they are on the three-year deed system, that they look at their BDBNs and get a separate legal opinion.
“A lot of these advisers could be exposed and they could be doing things that are effectively legal work which is ‘where the wool has been pulled from under them’ because the WA Supreme Court has come out and said again the SIS provisions do not apply.”
Furthermore, Mr Butler pointed out that judgments in the REST Super which was also confirmed in HESTA decision, called into question whether importing the SISA and SISR BDBN requirements may give rise to even bigger problems than an inability to implement non-lapsing BDBNs. In a 189-page judgment Justice Blue had said that those provisions “are ambiguous and uncertain and lead to difficulties and should be recast by the Commonwealth”.
“In any event being a law firm, we’re seeing the dangers and risks of doing a BDBN and increasing disputes, and our firm at the moment is working on a couple of disputes whether a BDBN is valid or not,” Mr Butler said.
“We really have this system now that there’s a lot of BDBNs out there and very rarely does a BDBN pass our scrutiny that it is actually unchallengeable. We often find reasons to pick apart or pull apart and undermine BDBNs because they haven’t been done for one reason or another.”
Another aspect to watch out for is the document trail for an SMSF and this leads to the importance of planning for a very sound deed document trail for the BDBN, according to Mr Butler.
“I think it is time to review and revise this, and if you’re not comfortable, advisers should be there making sure they’re not exposed to the very unnecessary risk where it is technically legal work,” he noted.
“This includes where they may not be covered by their professional indemnity insurance, as they could have been contravening the Legal Profession Act in various jurisdictions and their professional guidelines where non-qualified lawyers should not be doing legal work.
“It is something to bear in mind, and a lot of people do not see those consequences from a mere innocuous document which is a form where often it’s thrust in front of a client for completion.
“When you do complete it, it has to be part of the holistic estate plan, which should not be done in isolation apart from an overall approach to the estate planning for that client and their family, and this is often something that’s overlooked.”
Although of course Wooster v Morris highlights the risks in determining that a BDBN isn’t valid without seeking direction from the Court. Thus, advisers should be cautious when ‘picking apart’ BDBNs. And of course a Court decision in another state is merely persuasive. A client would not want the rug pulled out from under them, or the wool pulled over their eyes.
This is so on point. Financial Advisers using compliance designed SoA templates routinely recommend the client executes a BDBN. That is it, no deeper analysis of the “why”, with the justification simply stated as something along the lines of creating certainty. In many cases, the action is far from creating certainty.
If the direction is to the estate, you are making the super a testamentary asset and therefore, there are many moving pieces.
Unless a super member wants their super to go directly to a beneficiary and by-pass their estate, Financial Advisers should only be [b]suggesting the consideration[/b] of a death benefit nomination after they consult with their estate planning lawyer.
In the event that the advice is payment directly to a beneficiary, it could be a recommendation, but only on the basis that the trust deed is in sync with the nomination.
Acting in a client’s best interests requires passing the advice baton when there is not the expertise. This is also an ethical requirement under the FASEA Code.
This sounds very complicated, I wouldn’t be having an SMSF, too dangerous!
Horses for courses Rob. Although we are SMSF specialists we’ve set up very few in 3-4 years and have used retail a lot more. Used correctly and in the right circumstances they are a fabulous tool. The reasons for using them have diminished a lot.
Not sure if you have seen some of the horrendous client outcomes caused by retail support but especially industry super disputes?
There are some sobering and really nasty outcomes for some people here too. It’s not as safe as you think.
At the end of the day, the Deed and BDBNs do not matter. Whoever has the gold makes the rules. It can go to court, but by then the money will be gone or used up by legal costs!
Correct, much safer in a retail fund.