Court hands down decision in SMSF death benefit case
A recent decision by the Supreme Court of NSW has determined whether a $12.9 million death benefit from an SMSF should be designated as notional estate.
The decision, Benz v Armstrong; Benz v Armstrong; Benz v Armstrong  NSWSC 534, involved three sets of proceedings, each involving a claim by one of six adult children of a deceased surgeon, Dr Benz, for provision out of the estate or notional estate.
A fourth claim of provision, which was brought by another of his children, John, was settled prior to the hearing.
The defendant in each of the three sets of proceedings was the deceased’s second wife, Erlita Espanol Armstrong, who is the executor of the deceased’s estate and the main beneficiary under the deceased’s last will dated 13 September 2012.
The deceased had been married twice. His first wife, Dr Gwenneth Benz, to whom he was married on 23 March 1963 and with whom he had six children, died on 6 May 2011. The deceased married his second wife, Erlita, on 10 June 2012.
He was survived by Erlita, his six adult children from his first marriage Michele, John, Robert, Anna, Andrew and Catherine, and his step-daughter, Maree.
The deceased commenced a relationship with Erlita during his marriage to Gwenneth.
Following his marriage to Erlita, the deceased made his last will dated 13 September 2012. Probate of the will was granted to Erlita on 11 September 2020.
By clause 2 of the will, the deceased appointed Erlita as his executor and trustee. Pursuant to the will, the deceased left to Erlita: the account balances in any pension scheme or superannuation fund or death benefit, a property in Centennial Park, money in a specified bank account and all the shares held by the deceased in public companies.
The will directed the trustee to “do all in her power to give effect to [the deceased’s] intention” that the balance of any superannuation fund or pension scheme in which he had an interest (non-estate assets) pass to Erlita. Pursuant to clause 7 of the will, the residue of the estate was to be divided equally amongst the deceased’s six children.
At the time of his death, the deceased was a member of an SMSF. The total value of his member benefit was $12,913,476 as at 1 July 2019, including $11,286,319 as an investment fund, which mainly comprised of listed shares and $1,627,157 as a pension amount.
The deceased executed a binding death benefit nomination in respect of his superannuation on 12 May 2016, within three years of his death, in favour of Erlita, as his spouse.
The corporate trustee, of which he was the sole director at that time, resolved to accept the binding death benefit nomination on 12 May 2016. Erlita was appointed as director of the corporate trustee subsequently, on 19 May 2016.
Following the death of the deceased, Anna, Catherine and Andrew brought a claim of provision out of the deceased’s estate or notional estate.
After the commencement of the family provision claims by Anna and Catherine and before mediation was scheduled to occur, there was a transfer to Erlita of $9,282,490 in shares in specie as a death benefit pursuant to the binding death nomination.
After the commencement of the family provision claims by Anna and Catherine; and after the parties had been ordered to mediation but before the mediation was scheduled to occur, there was a transfer to Erlita of $9,282,490 in shares in specie as a death benefit pursuant to the binding death nomination.
In her then capacity as administrator of the deceased’s estate, Erlita filed an affidavit of administrator on 2 July 2020 disclosing the following estate assets: a one-quarter share of a property in Bondi Junction (valued at $108,750); a one-quarter share in the garage, which is a lot in the strata plan of the Bondi Junction property (valued at $15,500); the Centennial Park property (valued at $660,000); cash in a bank account; motor vehicles (valued at $75,750); a share in a trust called Whitefold (valued at $2.00); a share in a corporate trustee called Harly (valued at $2.00); furnishing and fittings and artwork (estimated at $10,060); and shares in public companies (valued at $3,409,177.83). The total value of the assets of the estate was thus said to be $4,513,127.60.
The expenses of the estate (totalling $2,031,533) were at that time said to be: a loan owed to the trust Whitefold ($2,017,228); funeral expenses ($12,600, less paid; the balance being $400); and a cemetery plot ($13,905).
The net value of the estate was thus calculated as at 2 July 2020 to be $2,481,594.60 (being assets of $4,513,127.60 less liabilities of $2,031,533). Following the settlement of litigation initiated by John, the value of the net distributable estate is said to have been reduced to $2,278,463.
After the distributions were made under the will in favour of Erlita, the property left in the estate was the Bondi Junction property, the motor vehicles, and the furnishing and fittings, valued at a total of $201,060.
As the residue of the estate ranks behind the specific gifts in the order of distribution in part 2 of the third schedule of the Probate and Administration Act 1898 (NSW), Erlita acknowledged that the residual beneficiaries would expect to receive nothing from the estate.
In her affidavit of administrator, Erlita identified that the following property may be notional estate: a one-half interest in the Wahroonga property (valued at $1,300,000 as at 26 May 2020); a one-half interest in a Pymble property (valued at $750,000 as at 26 May 2020); 23,889 shares in National Australia Bank ($452,935 as at 17 June 2020); and 17,148 shares in Westpac Banking Corporation ($311,236 as at 17 June 2020).
In an updated administrator’s affidavit on 11 October 2021, Erlita deposed to her opinion that the proceeds of the deceased’s superannuation fund did not form part of the deceased’s notional estate and that the deceased’s superannuation death benefit of over $12,900,000 passed to Erlita by way of binding death nomination and distribution.
The plaintiffs calculated that by including the death benefit as potential notional estate, that would mean that the amount capable of designation as notional estate would be in the order of $17.9 million.
This would be comprised of half of the Wahroonga property at $2.562 million; half of the Pymble property at $1.162 million; at least one-quarter of Bondi Junction property valued at $177,000; shares valued at $1.1 million and the death benefit superannuation funds valued at $12.9 million (with a distribution in specie having been made to Erlita of shares worth about $9.2 million).
The issues considered in this case related to whether the provision for each of the three plaintiffs was inadequate for his or her proper maintenance and advancement in life, and if so, what orders should be made.
The court also needed to determine to what extent property held jointly by, and superannuation of, the deceased be designated as notional estate of the deceased.
The binding death benefit nomination relevantly left all of the deceased’s existing pension-based accounts to Erlita as his spouse. Hence, Erlita contended that she is entitled to the superannuation proceeds.
Erlita submitted that it was the usual practice for superannuation entitlements to pass to the surviving spouse, and that this was the practice that was adopted by the deceased in respect of both his late wife Gwenneth and in respect of herself.
The plaintiffs, on the other hand, submitted that the relevant property transaction, which was the failure to revoke the binding death benefit nomination proper to his death and to make a replacement nomination, took effect for the purposes of s 77 of the Succession Act, either on the date of the deceased’s death, at which time he was no longer entitled – or logically, able – to exercise the power to revoke his nomination, or on the resolution of the corporate trustee to accept that nomination on 12 May 2016.
They stated that the deceased had the capacity, at any time, to revoke his nomination and to give a replacement nomination and that he omitted to do so. They stated that had he exercised that capacity, the deceased could have directed that his superannuation be paid directly to one or more of his children, or to his legal personal representative to form part of his estate.
The plaintiffs submitted that, by omitting to revoke his nomination and/or give a replacement nomination, the deceased brought himself clearly within the purview of sections 75 and 76(2)(a) of the Succession Act.
Chief Judge in equity Julie Ward noted that the issue of notional estate provisions that concern omissions was considered by Justice White in the case Wardy v Salier.
“His honour affirmed the proposition that the purpose of the notional estate provisions is to extend the powers of the court to the ‘full range of benefits and advantages controlled by testators’ and, insofar as any question of construction presents a choice, a construction which will promote this purpose is to be preferred,” she explained.
“In that context, his honour held that, where a transaction involves an omission, what is required is either an omission of a deceased person which changes how property is held or an omission of a deceased person, who was entitled to deal with property so that it would become part of his or her estate, but omitted to do so, so that there was no change as to how the property was held.
The plaintiffs claimed that the omission to revoke and renew the nomination led to the superannuation falling outside of the deceased’s actual estate.
Justice Ward accepted that the deceased’s failure to revoke his nomination and give a replacement nomination was a transaction within the meaning of s 76(2)(a) of the act.
“I consider that the omission to revoke a nomination is analogous to an omission to sever a joint tenancy, in light of the fact that the deceased’s nomination could be revoked at any time prior to his death pursuant to Superannuation Industry (Supervision) Regulations 1994 r 6.17A(5)(b),” she stated.
“Indeed, the nomination form completed by the deceased included a term stating that the deceased could revoke the nomination at any time and give a replacement nomination. Thus, it was not until the moment of death that the failure to revoke the binding death nomination took effect.”
The court concluded that the superannuation proceedings form part of the deceased’s notional estate capable of designation for the purpose of making any family provision orders.
Justice Ward also concluded that there was inadequate provision made for each of the three plaintiffs in circumstances where each will receive nothing out of the deceased’s estate.
“The estate of the deceased is a large one; there are no competing claimants in respect of the estate of the deceased; and there was an expectation within the family that all children would share in the deceased’s estate,” she noted.
“Relevantly, the evidence establishes a history within the family of assistance by the deceased in setting his children up in life with appropriate property holdings. There can be no doubt that, as events have transpired, the deceased’s testamentary intention that his children receive an inheritance from him was not able to be discharged.
“In terms of the deceased’s moral obligations to his children, it seems extraordinary to think that (absent some far more serious fracture in the relationship with his children) the deceased would have intended his children to obtain nothing at all from his very large estate, in particular when Erlita has already obtained substantial wealth both through the relationship and under the will and where the deceased’s step-daughter, Maree, resides rent free in an apparently not insubstantial property (the Pymble property) which passed to Erlita by way of survivorship.”
Justice Ward determined that in light of these matters, there was no adequate or proper provision made for any of the three plaintiffs.
Justice Ward proposed making a raft of orders but noted she would defer making the orders for seven days to permit any submissions as to the precise form of the orders.
In relation to Anna’s proceeding, she proposed an order that there be further provision out of the estate of the late Dr William Benz in favour of the plaintiff, in the form of a legacy in the amount of $1.9 million, n lieu of the gift under the deceased’s will of a one-sixth equal share of the deceased’s residuary estate.
In regards to the proceedings by Catherine and Andrew, she proposed an order that there be further provision out of the estate in favour of Catherine and Andrew in the form of a legacy in the amount of $900,000 for each, in lieu of the gift under the deceased’s will of a one-sixth equal share of the deceased’s residuary estate.
Justice Ward also proposed an order that the following assets be designated as notional estate as necessary for the purposes of enabling the executor of the deceased’s estate to meet the order for provision and the order for costs in favour of the plaintiffs:
(i) NAB shares transferred to the defendant on 10 January 2019;
(ii) Westpac shares transferred to the defendant on 23 January 2019;
(iii) The $9.2 million worth of shares transferred in specie to the defendant from the deceased’s superannuation fund; and
(iv) The Pymble property, as defined in these reasons.
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.