DBA Lawyers director Daniel Butler said there are a number of deeds surfacing that state that a binding death benefit nomination (BDBN) will be overridden by a reversionary nomination.
“It’s a very poorly designed deed because if the client has got a reversionary nomination in place and three or four years down the track [they then want] a BDBN, and you don’t have your eye on the ball, that reversionary nomination will take precedence over that BDBN,” Mr Butler explained.
Mr Butler said the deed should instead expressly state that the BDBN will override a reversionary nomination to the extent of any inconsistency.
Deeds that have the reversionary nomination as the priority, he said, are “poor practice” and “dangerous for both SMSF professionals and their clients”.
“For you as an adviser, it’s a very dangerous practice, because if you [set up] a pension, that [then becomes] legal work because you are upsetting the BDBN and that’s affecting a legal right,” he explained.
“That could be in breach of the legal practice legislation, that could be loss of professional indemnity insurance and there could be consequences for your client because you haven’t brought that to account when you were doing the BDBN or when you’re doing the reversionary nomination. You haven’t realised that you’re now affecting the BDBN. It’s dangerous territory,” he explained.
Mr Butler said there are currently a number of lawyers working to crack down on some of the poorly constructed legal documents being offered by certain suppliers, including those for SMSFs.
“They are focusing on supply operations that don’t operate through law firms, supply their documents through the web, don’t check anything but make out that its signed off by a lawyer [when its not],” he said.
John Morgan, a barrister from the Victorian Bar has also previously warned SMSF accountants and advisers on some of the risks with supplying legal documents, particularly in certain jurisdictions.
“I would caution tax agents from using non-lawyer services to supply supposedly ‘standard form’ documents. The origin and quality of these standard documents is uncertain and neither the tax agent, nor the client, is in a position to assess the quality of the document, much less whether it suits the client’s circumstances,” he told SMSF Adviser.
Miranda.Brownlee@momentummedia.com.au
Hi all
It is pleasing to see that this article has given rise to some discussion. Thus, I will respond to the comments above (briefly) to clarify the position:
1. The key point –– as reflected in one of the above comments –– is that the SMSF deed and pension documents that are used must be clear and appropriate. My review of many, many documents over many year of practice is that many fall far short of providing any clarity in this area.
Indeed, there should be never be any discrepancy between a reversionary nomination or a BDBN. However, if there is, then there is a potential costly and protracted legal action. Thus, what ‘tie breaker’ provision does the document provide where there is conflict to resolve a potential dispute (between the reversionary nomination and BDBN)?
The DBA Lawyers’ SMSF deed covers this by expressly stating that the a BDBN overrides a Reversionary Pension (which is defined in our deed) nomination to the extent of any inconsistency.
Many non-DBA SMSF Deeds do not and render users subject to potential legal claims as humans are bound to make errors and there may very well be a mismatch along the way between the members reversionary nomination and BDBN.
Many advisers setting up a pension these days simply rely on computer software to commence a pension without any consideration in mind at that time for estate planning. A simple press of the button by a junior staff member to obtain pension documents, may jettison all the estate planning work done in conjunction with the member’s lawyers. Advisers who are not qualified are therefore placed at considerable risk as alluded to in the above article.
2. At DBA Lawyers we have over many years refined our position to make sure we provide the legally best solution for our clients and each of our legal documents are actually signed-off by a qualified and registered legal practitioner providing great protection to our clients.
This is one reason why we make it clear in our documents; especially what is to happen if there is ever any conflict (ie, our BDBN will win out against an inconsistent reversionary nomination). In contrast, if a reversionary nomination is to win out, we then start questioning, well what is a reversionary nomination? Is it an automatically reversionary nomination? Is it a discretionary reversionary nomination? Or could it be some other type of pension nomination?
Furthermore, some suggest that a pension, eg, an account-based pension or a TRIS cannot be made reversionary once commenced and must be commuted so that a fresh pension can be commenced which is reversionary. While we do not accept this view if the documents are appropriately worded, this provide more issues for advisers to consider if they seek to place the priority on a reversionary nomination (whatever that means).
One comment above suggests that having the reversionary nomination take precedence will increase costs. This is a misguided comment given that these matters relate to peoples’ legal entitlements and unless they are appropriately and properly documented, the costs can be substantial if there is any uncertainty and any legal dispute. There is only one way to do this work and that is properly. Those who want cheap and who wish to sacrifice clients if they use inferior documents will at one stage be made accountable and the costs and damages will then come home to roost.
3. Finally, it should be noted that the ATO, with respect, are the administrators of our tax system with some supervision in respect of the Superannuation Industry (Supervision) Act 1993 (Cth) in relation to SMSFs. The ATO is not an authority that advisers should rely on for legal advice. Indeed, the NTLG minutes are not binding and the law has developed considerably since 2010. Thus, the comments in the 2010 NTLG sub-committee minutes are not an accurate statement of the law nor should they be relied on as such. Indeed, the most pertinent comment from the 2010 NTLG minutes are repeated below which support my point outlined above:
If the governing rules of a SMSF authorise a death benefit nomination, the trustee must follow the fund’s rules …
Finally, I am a legally qualified legal practitioner with more than 30 years experience. I have been involved in many disputes, negotiations and court battles over my many years of practice. Further, DBA Lawyers, which is a leading SMSF law firm, works in conjunction with some of the leading estate planning law and advisory firms throughout Australia. Thus, I feel that I am qualified to comment on this area. It is very disturbing when we continually see documentation that is not fit for purpose being relied on and when a dispute arises how costly and complex the issue can be to resolve.
That’s why our main mission is to provide the best SMSF documents in this country.
Daniel Butler, Director
DBA Lawyers Pty Ltd
This is precisely the opposite of the preferred position in the vast majority of cases. If a reversionary pension nomination overrides a binding death benefit nomination, it allows a member to specify what will happen with the vast majority of their benefits (and what will happen in default of their first preference failing), but it will also allow a member to set aside a portion of their benefits as a reversionary pension to their spouse.
Under Daniel’s scheme, that would require a complex binding nomination and, as we all know, at law complex=expensive=risky.
In this instance, the costs of Daniel’s approach outweigh the benefits of reversionary pensions trumping BDBNs.
If a binding death benefit nomination overrides a reversionary nomination wouldn’t the pension cease at the date of death and the pension fall back to the accumulation account diluting the tax-free components that had previously been locked in at the pension commencement? It’s not a one size fits all approach as Dan seems to be suggesting here. One could also argue that if the fund’s deed gives precedence to a BDBN over a reversionary nomination an advisor could find themselves in an equal amount of trouble should the intended reversionary recipient be left with nothing due to the workings of the deed. This could be especially dangerous where the fund has multiple pensions with different reversionary nominations, and the new deed gives precedence to the BDBN over the existing reversionary nominations. I think the key thing to keep in mind is that you need to read the deed before making reversionary or binding death benefit nominations.
I remember the Commissioner of Taxation looking at this issue at a NTLG meeting in 2010 and stated: “‘There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.
While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs.
It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust.
The ATO’s view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner.
It is only where a trustee may exercise its discretion as to which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.’” If a deed enables a trustee to override a reversionary pension to the benefit of a BDBN then the 12 month TBAR suspension rule may not apply which could have excessive pension consequences for the beneficiary. It is important to get specialist SMSF legal advice to ensure the client has certainty, security and safety. I have just witnessed a SMSF estate planning case that cost more than $100,000 in legal fees to resolve because the deed was poorly written.
“National Tax Liaison Group (Superannuation Technical Sub-group) in March 2010”
The minutes confirm as follows:
‘There are no SIS Act or SISR provisions that are relevant to determining which nomination an SMSF trustee is to give precedence where a deceased pension member had both a valid reversionary nomination and a valid BDBN in existence at the same time of the member’s death.
While section 59 of the SIS Act and Regulation 6.17A of the SISR place restrictions on superannuation entity trustees accepting BDBNs from a member, as explained in SMSF Determination SMSFD 2008/3, the Commissioner is of the view that those provisions do not have any application to SMSFs.
It must also be remembered that section 59 of the SIS Act and regulation 6.17A of the SISR are necessary because of the general trust law principle that beneficiaries cannot direct trustees in the performance of their trust.
The ATO’s view is that a pension that is a genuine reversionary pension, that is, one which under the terms and conditions established at the commencement of the pension reverts to a nominated (or determinable) beneficiary must be paid to the reversioner.
It is only where a trustee may exercise its discretion as to which beneficiary is paid the deceased member’s benefits and/or the form in which the benefits are payable that a death benefit nomination is relevant.’
Incorrect. There is currently no binding advice available from the ATO, but they have indicated in a non-binding meeting of a 2010 super subcommittee that the auto-reversionary pension should take precedence as the Trustee usually does not have discretion to do anything other than automatically pay the reversionary pension.