A definitive recent court decision over death benefits would do nothing to stop them being the single biggest cause of SMSF legal disputes said the superannuation leader at CA ANZ, Tony Negline.
Speaking on the latest Accountants Daily podcast, Mr Negline said the High Court judgment in the recent Hill versus Zuda case made clear that an SMSF binding death benefit nomination (BDBN) was not bound by the same rules as APRA funds.
These specify a three-year lifespan for a BDBN, after which the nomination must be confirmed or changed.
Mr Negline said in the relevant case, Zuda was the trustee of the fund and Ms Hill was the aggrieved potential death benefit beneficiary who was not named in a binding nomination and sought to challenge it.
“Ms Hill wanted all of those rules to apply to her dad’s self-managed super fund, because if they did, then his binding nomination was knocked out,” he said.
“It went to the WA Supreme Court and lost, and then went to the Court of Appeal in WA and lost, and then rolled the dice and sought leave to appeal to the High Court and the High Court said, yep, okay, we’ll look at it, and then lost again.
“So Miss Hill, who wanted to get some or all of her dad’s death benefit into the deceased estate, was not successful. The High Court decided the binding nomination was valid.”
He said now it was clear the relevant regulation (6.17A of the Superannuation Industry (Supervision) Act) applied solely to APRA funds and not to SMSFs.
“For a long time, the ATO has said that 6.17A did not apply to self-managed funds. Now Ms Hill has tested that and the High Court has agreed with the ATO.”
But the certainty was illusionary because the critical document remained the trust deed and that could be as variable as the lawyer who drew it up.
“The death benefit process and how you actually go about implementing these things is all driven by your trust deed.
“As long as your trust deed is in conformity with the SIS act – and this act is relatively vague on how a self-managed fund actually goes about implementing these things – it’s really up to the solicitor who’s drafting your trust deed to decide what it says. And then you’ve got to make sure you’ve implemented in accordance with those rules.
“There will be as many variations to these rules as there are lawyers in this country.”
Mr Negline said the death benefit rules were meant to be relatively simple.
“There’s only a range of people you can nominate: spouse, former spouse, any child, potentially a few other individuals as well, or your deceased estate.
“You can’t nominate your dog or your cat … and you can’t nominate a charity and you can’t nominate your best friend, because they’re unlikely to be your dependent. You can only nominate people you are related to, maybe some others, a relatively tight thing, or your deceased estate. That’s all you can do.”
But the number of disputes demonstrated that this was not a simple area.
“The biggest area of disputation in the courts in relation to self-managed funds is about death benefits and the validity of bonding nominations.
“If we took away disputes about deceased estates from the Supreme Courts, they would have a lot less work to do.
“It’s designed to be really simple, but the simplicity creates complex outcomes.”
He said it would be better to have a complex structure up front which gave greater certainty.
“If you have made the nomination and it’s quite clear that it’s been made in accordance with a schedule that’s in the SIS regs … then that cannot be challenged.
“I don’t know what the solution would look like but I think at the moment, all we’re going to have increasing amounts of disputation.
“Some people see a pot of gold, and they take action to get hold of that pot of gold, either before death or after death.
“I can’t think of any of the other court cases that have been run in relation to death benefits and so on that Hill versus Zuda would stop.”
[i]“It’s designed to be really simple, but the simplicity creates complex outcomes.”[/i]
A BDBN and a Will set out the clearly specified intentions of the deceased, yet they are often challenged in the courts. Typically so when there are big $$$$ involved.
It’s not the documents that create complex outcomes, it’s the greed of those who think they are entitled to a bigger slice of the pie.
How much of the deceased estate’s money would Mrs Hill have poured into all of these court cases, just to get her hands on the SMSF? I’m surprised there’s anything left.
A key trip hazard is the routine execution of a form template BDBN without any consideration of the trust deed requirements. If the document provider has issued the BDBN template in conjunction with the (SMSF) trust deed, you may presume the template is in accordance with the deed. Caution though is recommended to check for yourself! The biggest mistake though is the nomination of the LPR without reference to the member’s will. If the will hasn’t been drafted in contemplation of the receipt of super proceeds, there could be less than optimal tax outcomes and perhaps no consideration of asset protection strategies. Sending super to the estate moves the capital into the dispute arena so a poorly drafted will should be attended to. NSW will include super in the deceased’s notional estate in some cases so, there is a high risk for NSW super members of their capital being in the dispute arena. A duly executed BDBN is not going to shield the capital so avoid the temptation just because a form is there in front of you! Check all the moving parts in the member’s succession strategy.
It may be time for super to become an official testamentary asset rather than the defacto it is. The flexibility of having super as a non estate asset has always been a great feature of the system however, years of poor understanding at all stages of the super lifespan, coupled with the position of super as the largest asset outside the home of the deceased, has led to an equation of flexibility with the chance for a raid.