Avoid opening Pandora’s box with BDBNs
The SMSF sector continues to be plagued by BDBNs that are either carelessly prepared, invalid or completely unnecessary. What steps can be taken to prevent poor tax outcomes for clients or lengthy court battles?
Recent media attention regarding the witnessing of superannuation documents highlights the fact that a binding death benefit nomination that has not been validly prepared and executed is nothing more than an expression of wishes, which may or may not be followed after the member’s death.
In practice, there seems to be a view that the completion of a binding death benefit nomination is an appropriate strategy for all members of an SMSF, and is an administrative task that does not require the services of a lawyer.
Practitioners advising clients in this area should be aware of recent cases involving BDBNs such as Wooster v Morris and EM Squared v Hassan, in which the warring parties expended substantial resources arguing over the validity of a BDBN. Steering clear of such problems is possible, but practitioners must tread cautiously so as to avoid opening a Pandora’s box.
Is a BDBN the best solution?
In almost all situations, having a BDBN in place is only of secondary importance – far more critical is identifying who will be in control of the SMSF on the death of a member. If it is someone trustworthy, that person can be relied upon to carry out the member’s properly documented wishes in an efficient and tax-effective manner, rendering a BDBN redundant at best, and at worst, an annoying fetter on the trustee’s discretion leading to unsatisfactory outcomes.
Take, for example, a sole member SMSF with three children, who has a sizeable member balance in her SMSF and a carefully prepared estate plan, including a will incorporating testamentary trusts. If any of those three children find themselves being pursued by creditors at the time of the deceased’s death, they may prefer to receive their share of the deceased member’s balance by way of their discretionary trust, requiring the trustee to direct the member’s balance into the estate.
On the other hand, if the deceased member had a de facto partner likely to make a family provision challenge on the estate, the SMSF trustee would be better advised to direct funds away from the estate, as long as the NSW concept of notional estate does not apply, beyond the reach of a family maintenance claim.
Further, a carelessly prepared BDBN may force a trustee to pay a lump sum to a beneficiary, when allowing that beneficiary to receive a pension may have been a more tax-effective and prudent option.
Control of an SMSF is dependent upon the terms of the trust deed and does not automatically default to the deceased’s executors as appointed in their will. Careful reading of the trust deed to determine the correct strategy is vital.
Oft-forgotten steps in preparing a BDBN
Despite the above, it might be the case that the member’s next of kin cannot be relied upon, and that the certainty of a BDBN is desirable. In so advising a client, practitioners should turn their minds to the necessary steps involved in ensuring that such a document achieves its intended purpose.
Can a non-lapsing nomination be prepared?
The question of whether regulation 6.17A of the Superannuation Industry (Supervision) Regulations applies to SMSFs remains unanswered. While the Commissioner of Taxation has expressed a view that SMSFs can prepare non-lapsing BDBNs (see SMSFD 2008/3), conservative commentators have correctly noted that this determination does not settle the matter as it is not binding on any court or even the ATO. The determination has received judicial support in Queensland in Munro v Munro.
If it is accepted that the Commissioner’s view holds sway, practitioners should nonetheless be mindful that the position will be different from client to client, as a trust deed must explicitly permit non-lapsing BDBNs. The case of Donovan v Donovan – in which it was noted that the three-year expiry of BDBNs in 6.17A applied to a particular SMSF because the SMSF deed included the phrase “in the form required to satisfy the statutory requirements” – is a cautionary tale for all SMSF practitioners.
Are there additional requirements?
In the case of Wooster v Morris, an SMSF member died leaving behind two adult children from his first marriage, a second wife and a BDBN directing his member balance to his adult children. After his death, his second wife seized control of the SMSF, obtained advice that the BDBN prepared by the deceased member was invalid, and on that basis, ignored it, and determined to pay her husband’s balance to herself. The advice obtained by the second wife deemed the BDBN to be invalid on the basis that the deed required that the BDBN be delivered to the trustees, which it was not.
Practitioners should read each and every deed carefully to determine whether other requirements are imposed, other than the normal signing and witnessing requirements. For example, must it be delivered to or accepted by the trustee? In which case, the trustee should meet and accept such a BDBN, which should be recorded in a minutes of meeting of the trustee. Is there a prescribed form which must be used?
Get the wording right
A deceased member’s balance must be paid to a deceased member’s beneficiaries as defined in superannuation law. The wording of the BDBN is, therefore, of vital importance. In Munro v Munro, a binding death benefit nomination prepared by the deceased member’s accountant purported to pay the member balance to the ‘trustee of deceased estate’. It was argued that the deceased member intended that it be paid to his legal personal representative. However, the court disagreed and held that the nomination was invalid as it did not pay the member’s balance to a person permitted by law.
Who should prepare the BDBN?
Best practice estate planning is a multi-disciplinary task, and should at least involve advice from a client’s lawyers, accountants, financial planners and insurance brokers with proper communication between these trusted advisers.
Non-legal advisers should be aware that statutory provisions prevent non-lawyers from engaging in legal practice, and provide severe penalties for contravention. Alternatively, or in addition, a non-legal adviser who has engaged in legal practice may find that their professional indemnity insurance does not provide cover.
There remains no clear guidance as to whether the preparation of a BDBN is ‘engaging in legal practice’. On the one hand, completion of clerical tasks, which include filling out details in a form, is not legal advice, but advising on the specific consequences of having a BDBN in place, advising on how a particular form should be completed, selecting which form should be used and providing advice on legal consequences are all likely to be legal advice.
Despite the ease with which a blank form BDBN can be obtained, photocopied and printed, practitioners must be alert to the importance and intricacies of the document, and pay the appropriate amount of care when advising clients.
Trent McGregor, solicitor, Robertson Hyetts Solicitors