A recent decision handed down by the courts shows how basic misunderstandings can lead to disaster in the dividing of a trustee’s estate.
On 24 October 2013, the Supreme Court of Western Australia handed down a decision in Ioppolo & Hesford v Conti  WASC 389 which highlights the importance of making a valid binding death benefit nomination for an SMSF and the interrelationship between assets that are controlled by the will and those controlled by the terms of the trust deed.
In the Conti case, it was apparent that Mr and Mrs Conti were married but estranged. The Contis had an SMSF in which Mr and Mrs Conti were the sole member trustees. Mrs Conti made a will in January 2005 in which she appointed two of her four children executors of her will and expressed the desire that all of her entitlements held in the SMSF be paid to her children. Specifically, the will stated that she did not want any of her superannuation entitlements to be paid to her husband.
Mrs Conti died on 5 August 2010. Her will had remained unchanged at the date of her death. Her entitlements in the SMSF amounted to $648,586. It would appear that at her death Mrs Conti had not made a current death benefit nomination. She purported to have made a binding death benefit nomination in April 2006, which had lapsed.
The terms of the trust deed of the fund stated that, “In the absence of a binding direction from a deceased member the trustees may in their absolute discretion pay or apply the amount of the funds standing to the credit of a deceased member’s account to a spouse or child of the member or any other person who in the opinion of the trustees was a dependent or on the member at the relevant time.”
After Mrs Conti’s death, Mr Conti in accordance with the provisions of Section 17A of the SIS Act established a corporate trustee as the sole trustee of the fund and then made a resolution transferring all Mrs Conti’s superannuation benefits to himself and not to the beneficiaries (ie his children) mentioned in Mrs Conti’s will.
Mrs Conti’s children as executors of her estate took legal proceedings against their father in relation to this decision. They also applied to the Court to be appointed as trustee of the fund as Mrs Conti’s legal personal representative for the purposes of paying the superannuation death benefits in accordance with Section 17A of the SIS Act.
The Court found against the executors of the estate in seeking to claim the superannuation death benefits in accordance with the terms of the will and in fact made a “special costs order” against them.
In particular, the Court stated Mr Conti was within his rights to pay all of his wife’s superannuation benefits to himself as the deed specifically gave him this power in the absence of a written binding death benefit nomination.
The case highlights the current view of the courts in the superannuation law jurisdiction that they will take a strict “black letter” trust law view of the application of superannuation death benefits as written in the trust deed of the fund. The case also highlights the following key lessons of which clients should be aware:
1. The importance of reading and understanding the trust deed as it applies the superannuation death benefits. Reviewing your deed on these issues should be undertaken on a regular basis and as part of a review of your estate plan. The estate plan should be reviewed whenever the deed is updated, as the new provisions of the deed may invalidate an earlier death benefit nomination, even one expressed to be binding.
2. That a person’s will has no say or control over how a deceased person's superannuation benefits are paid, even if there is no written or valid binding death benefit nomination. In the Conti case, Mrs Conti had in fact made a binding death benefit nomination in April 2006 but this had lapsed after a period of three years. As far as the court was concerned, the fact that this nomination was made but had lapsed was not a relevant consideration nor did it have any force or effect in how the superannuation death benefits were to be distributed.
3. Following from the above, it was noted by the Court that Mrs Conti’s binding nomination made in April 2006 (which had lapsed) directed her superannuation death benefits to her husband, and yet her will purported to direct them to her four children. While this conflict was merely noted by the Court, its existence identifies that either Mrs Conti or the lawyer who drew her will fundamentally misunderstood the lack of power or control the will has over superannuation death benefits, and failed to take into consideration the provision of the trust deed and the death benefit provisions.
4. That whoever is the surviving member of the fund effectively takes control of the fund and its assets, in the absence of a valid and binding death benefit nomination. This is particularly the case where the surviving member acts promptly and within the six-month period to convert the fund to a single member fund with a corporate trustee in accordance with section 17A(2) of the SIS Act. In the Conti case this maneuver effectively locked out the executors of Mrs Conti’s will from being appointed trustees who could have otherwise had a say in how her superannuation benefits were paid;
5. That despite any contrary wishes expressed in the will (or a non-binding death benefit nomination for that matter), the surviving member’s self interest in exercising a discretion to paying the deceased member’s superannuation benefits to him or herself does not constitute “bad faith” nor is it an improper exercise of the power or function of the trustee.
Chris Hill is proprietor of Hill Legal, Lawyers and Consultants
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