Reviewing the SMSF document chain
With the number of death benefit disputes continuing to climb, ensuring a complete document chain, properly appointed trustee, and a carefully drafted deed and BDBN is increasingly critical for clients.
As the quantum of superannuation increases, the risk of superannuation death benefit disputes has become much higher, with the number of cases being litigated continuing to climb. Implementing clear and considered strategies to minimise the risk of death benefit disputes and to manage other potential issues that may arise is therefore vital writes Madgwicks special counsel Rebecca James.
Death benefit disputes involving superannuation are becoming increasingly common as illustrated by the increasing number of cases involving a challenge to the control of the fund, the validity of binding death benefit nominations (BDBNs) and the exercise of the trustee’s discretion. Accordingly, it is imperative trustees take proactive steps to minimise the risk of a death benefit dispute arising.
What you need to know
Having a first line of defence in preventing a death benefit dispute and potentially costly and time-consuming litigation is crucial. The following strategies are effective starting points in avoiding disputes:
- A comprehensive document history review. It is important to ensure the document chain is complete and correctly executed;
- Reviewing and amending, where required, the fund deed;
- Reviewing or implementing a BDBN for each member, subject to the member’s broader estate planning considerations; and
- Considering and planning for control of the fund changing on the member’s death.
Comprehensive document history review
A simple mechanism for challenging the decision of an SMSF trustee is to establish that the trustee didn’t have sufficient power to make the decision, or that the trustee was not validly appointed.
Accordingly, an important step in minimising the risk of future death benefit disputes is to conduct a thorough and comprehensive document history review. This involves ensuring the fund trustee and all other required parties have correctly signed and dated copies of the original fund deed, along with each amending deed and any change of trustee documents.
Each amending deed and change of trustee should also be reviewed to ensure that:
- The amendment or appointment and removal of trustee has been undertaken strictly in accordance with the relevant power under the fund deed and superannuation law and any requirements in relation to form or delivery have been satisfied; and
- The correct entities are parties to the relevant deed or document, and copies of written resolutions have been retained.
For example, where the fund members have power to appoint and remove the fund trustee, the members must be a party to the deed of appointment and retirement of trustee, and a written resolution resolving to appoint the new fund trustee and remove the existing fund trustee should be retained with the fund’s records.
Where there is an issue with the document chain, or a document has been misplaced, there are a number of options that can be considered to rectify the omission, such as making an application to the Supreme Court, or more commonly, preparing a deed of confirmation and rectification. Trustees and members should obtain advice regarding the various options available, including the suitability and effectiveness of the options before proceeding. Importantly, it becomes increasingly more difficult to rectify any deficiencies in the document chain once a dispute is in progress.
Terms of the fund deed
The provisions of the fund deed governing the payment of death benefits and the class of beneficiaries eligible to benefit under the deed should be reviewed. If these provisions of the fund deed are unsatisfactory, the deed should be amended.
While it is common for fund deeds to contain weighted voting provisions where there is a dispute or the members are deadlocked, the fund deed could be tailored to better address death benefit disputes. For example, the fund deed may provide that subject to certain exceptions, such as manifest error or inconsistency with superannuation law, a fund trustee must seek the judicial guidance of the court before determining that a BDBN is not valid and binding on the trustee. This would address the criticism of the court in Wooster v Morris, as well as ensuring that a valid and binding BDBN is more likely to be followed by a trustee, even if the control of the fund on the member’s death has not been adequately managed.
Binding death benefit nomination
In conjunction with a properly drafted fund deed and the implementation of strategies to ensure the control of the fund passes to the anticipated decision-maker, a BDBN is an effective strategy for bypassing the discretion of the fund trustee and ensuring superannuation death benefits are paid in accordance with the wishes of the member.
There are, however, a number of issues to consider when drafting a BDBN. Critically, the terms of the fund deed, as to form, content and any other specific requirements, must be strictly complied with in preparing the BDBN. Further, the BDBN must be properly executed and any applicable witnessing requirements satisfied.
The nominated beneficiaries must also be eligible to receive the member’s superannuation benefits under the fund deed and superannuation law. The interaction between a BDBN and any reversionary pension documents should also be considered. Generally, the fund deed will provide that the reversionary pension will take precedence over the BDBN. It is important, however, to draft the BDBN in such a way that if the reversionary nomination fails for any reason, the benefits are captured by the BDBN.
Careful drafting is also required where the member intends that up to $1.6 million of their superannuation benefits will be paid to their spouse as a pension, with the remaining benefit being distributed in accordance with the terms of the BDBN. For example, if the BDBN referred to an amount permitted under superannuation law to be paid to the spouse, the spouse would be entitled to receive 100 per cent of the benefit, irrespective of the amount or the applicable transfer balance cap under tax law, as there are no limits on the amount an eligible beneficiary can receive under superannuation law.
Control of the fund
A critical consideration is who will control the fund on each member’s death. As the trustee generally has power to determine who will receive a member’s death benefits, subject to a valid and effective BDBN, the power to appoint and remove the fund trustee effectively confers control of the fund. Therefore, determining who will have power on each member’s death under the fund deed to appoint and remove the fund trustee, as well as amend the fund deed, should be carefully considered. Steps should be taken to ensure control will reside in the intended person.
Further, where the fund has a corporate trustee, the shareholding should be reviewed, including the number, class of shares, voting rights and identity of the shareholders, and changes made where necessary. This is critical as shareholders generally have power to appoint and remove the directors of the corporate trustee subject to ensuring the structure complies with superannuation law. Thus, each member should make provision in their will to specifically address the transfer of shares in the corporate trustee on the member’s death.
The parties may also wish to consider a tailored trust deed that provides that each member’s legal personal representative must be appointed as a trustee or director of the corporate trustee for the fund on the member’s death. Again, these provisions should be carefully drafted to ensure they are consistent with superannuation law, trust law and the Corporations Act 2001 where the fund has a corporate trustee.
Key steps to take where a dispute is foreseeable
If a death benefit dispute is likely to arise and the member has not made a valid BDBN, trustees who proactively manage the situation will be in a better position to successfully defend the process ultimately leading to the exercise of the trustee’s discretion being upheld. Importantly, trustees are not required to provide reasons for any decision made. As a first step, trustees should seek information and evidence substantiating the financial position and dependency of each potential eligible beneficiary.
While some trustees may be concerned this approach could bring each potential beneficiary’s right to be considered to their attention, not doing so could expose the trustee to a claim that it did not take appropriate steps to gather all necessary information to make an informed decision when exercising its discretion, and a challenge that the trustee therefore acted in bad faith. The failure to implement a proper process could also result in the fund trustee contravening superannuation and trust law.
Finally, beneficiaries may be reluctant to provide their financial information to the trustee and as a result, may be less inclined to challenge the exercise of the trustee’s discretion.
While it is impossible to eliminate the risk of a death benefit dispute arising, there are a number of strategies and preventative measures that can be implemented to minimise the risk of a successful challenge, both to the legitimacy of the trustee’s appointment and the exercise of the trustee’s discretion to pay a deceased member’s superannuation death benefits to one or more eligible beneficiaries.
As outlined above, a complete document chain, properly appointed trustee and carefully drafted fund deed and accompanying BDBN are the first line of defence in preventing a death benefit dispute and avoiding potentially costly and time-consuming litigation.
Rebecca James, special counsel, Madgwicks