Another court ruling, another warning for SMSFs

Master Craig Sanderson of Western Australia's Supreme Court had to make two distinct rulings in relation to this case:

• Is it compulsory for the surviving member/trustee of an SMSF to appoint a deceased member's legal personal representative (executor) a trustee of the fund for the purposes of the payment of a death benefit?; and

• Is the surviving member/trustee of an SMSF compelled to pay the deceased member's death benefit as specified in the deceased member's will?

Augusto and Francesca Conti established an SMSF in 2002. Augusto and Francesca were both members and individual trustees of the SMSF.

Subsequent to Francesca's death, Augusto established a corporate trustee of the SMSF of which he was the sole corporate officer as he was the sole surviving member of the SMSF.

Francesca died in 2010. She had made her will in 2005. In her will she directed that her superannuation death benefit be divided equally between her children.

In 2002 and 2006, Francesca made two binding death benefit nominations (BDNs) leaving all her death benefits to her husband. These nominations, in accordance with the SMSF's Trust Deed, lapsed after three years. Consequently Francesca died without a BDN.

Ultimately, Augusto paid all Francesca's death benefits to himself in accordance with the provisions of the SMSF's trust deed. Francesca's executors on behalf of the beneficiaries of her will took exception to the manner in which Augusto had paid the death benefits. They instigated proceedings in the Supreme Court of Western Australia against Augusto and the corporate trustee of the SMSF.

The plaintiffs contended that they should have been appointed as additional trustees to the fund for the purpose of the payment of Francesca's death benefits. They also applied that the Court direct that Francesca's superannuation death benefits be paid in accordance with the directions contained in her will.

Master Sanderson found in favour of Augusto in both issues argued. He found:

• Augusto has acted in accordance with the provisions of the operative trust deed of the SMSF both establishing the corporate trustee post Francesca's death and paying all her death benefits to himself as Francesca's dependent. The unfettered discretion of the trustee, in the absence of a BDN, to make the latter determination was emphasised by Master Sanderson; and

• The provisions of Section 17 of SIS did not give the legal personal representatives (the executor/defendants) the automatic right to be appointed as trustees of the SMSF for the purpose of the payment of Francesca's death benefits.

Conclusion:

As with Katz v Grossman and Donavan v Donavan in respect to the payment of superannuation death benefits all the solutions relate to the validity of a BDN. These are always contained in the operative deed of the fund.

There is a simple solution to Conti. It would have saved considerable trouble and substantial expense. Francesca, at the time of her death, should have had a valid BDN. The terms of the BDN: pay all her superannuation death benefits to her Estate. If this occurred, regardless of whom or what was the SMSF trustee of the SMSF, Francesca's daughters would have benefited as she wished.

The terms and conditions of the operative deed of an SMSF must be reviewed to provide for the payment of superannuation death benefits. Advisers should have this matter at the top of their check lists with clients. Not to do so could potentially result in the adviser being a party to court action, as in Conti.

There is an easy solution to prevent any opportunity of an Ioppolo disaster befalling SMSF members:

1. Have a trust deed that enables a member to nominate who will be their replacement trustee of the fund when they die; and

2. Make sure they have a valid, up-to-date death benefit nomination.

Rule 2.9 of the Paratus SMSF Trust Deed deals specifically with the issue of who will be a deceased member's replacement trustee at the time of death. This can be, without a definitive direction from the deceased member, the deceased's legal personal representative - their executor.

Additionally, the Paratus Deed allows member of the fund two elections as to their death benefit nomination:

1. A binding non-lapsing death benefit nomination; or

2. An SMSF will

Rule 11 of the Paratus Deed enables the creation of an SMSF Will for a member. Once completed, unlike a simple death benefit nomination, an SMSF will becomes a rule off the fund. Specific directions as to what assets will pass to what parties can be established.

The SMSF will is ‘set in stone’ and can only be changed by the member. It is non-lapsing and binding on the trustee once accepted.

Problems with the payment of superannuation death benefits will continue to find their ways to the courts and fill the coffers of the legal profession unless they get the attention they deserve.

Ian Glenister is principal of Glenister & Co, Superannuation & Estate Planning Lawyers and a director and co-founder of The SMSF Academy.