Balancing discretion and direction approaches for death benefits

In a recent Topdocs technical webinar, Topdocs head of training Michael Harkin said, as time has gone by, advisers preferences have moved constantly between trustees having discretion or direction when it comes to how death benefits are going to be applied.

Mr Harkin noted that, in prior years, the thinking was that with the BDBNs lapsing after three years, there might not be so much value in putting them in place and it may be better to maintain discretion with the trustee at the time.

“However, the issue with discretion has sort of popped up a little bit more favourably of recent times since the introduction of the transfer balance cap on 1 July 2017,” he said.

“The reason for that is it provides flexibility to determine based on the circumstances applicable at the time whether the benefits should be or can be paid as a pension, and if they can, how much can be paid and whether other money should pass to individuals as a lump sum, or to the estate and then possibly to go into super proceeds trust or a testamentary trust.

“Those decisions where there’s a discretionary aspect can be made at the time based on the circumstances.

“Whereas if we go back to the direction approach, it’s all going to depend because the quality of the documentation is going to have a bit of a bearing on whether the direction was good or bad, effective or not, and a lot of the cases fall into those areas.”

Mr Harkin said that advisers should consider that, basically, all of the estate planning documentation and including wills must complement each other because, if they don’t, there are higher chances to enter into conflict situations that bring about legal action.

“If they are complementary, it goes a long way to removing any potential conflict,” he noted.

“When it comes to conflict, advisers need to note that the conflict can come from the competing interests that are looking for some money from the deceased benefits, and there are issues that arise from that and particularly in relation to where there is discretion.

“But meanwhile, even where there’s direction, the trustee may not act impartially, they may decide to pay themselves and that provides a significant conflict, and effectively, some of the cases have shown us that trustees should not act in a conflict position.”

Even where the deed might provide some authority to the trustee to look after themselves as a first call, Mr Harkin noted it may only mitigate the risk and not fully absolve the trustee from looking after themselves.

SMSFs in blended family situations are also very often at risk and it is also because there is no one-size-fits-all approach.

“The competing interests are also generally going to be dissatisfied potential beneficiaries, and they can be an accident waiting to happen,” he said.

“In particular, we note that trustees are subject to very strict duties. These duties include the duty to properly inform themselves.

“Further, trustees must take great care to ensure they exercise discretion in good faith, upon real and genuine consideration, and for the purposes for which the discretion was conferred.

“As advisers, we don’t know what the intentions of the deceased were and that’s where that planning is essential and it can at a larger extent at least cut off any sort of uncertain claims in the future.”