Gary Anders | September 2022
This article was current at the time of publication.
Each of the 600,000 self-managed superannuation funds (SMSFs) in Australia has trust deeds that set out rules for establishing and operating them.
These include objectives, who can be a member and whether benefits can be paid as a lump sum or income stream.
However, what happens when a member is incapacitated or passes away?
Further, has the SMSF trust deed been worded in a way to ensure the wishes of an incapacitated or deceased member are followed?
Preparing binding death benefit nominations
SMSF members can nominate who will receive their benefits when they die via a binding death benefit nomination, which directs the fund’s trustee to pay the benefit to either a legal personal representative or a dependant.
Even so, given incapacitation or death, their death benefit wishes could be open to legal challenge.
The High Court Of Australia recently ruled in the case Hill v Zuda Pty Ltd  that, subject to how an SMSF trust deed is written, a binding death benefit nomination can last indefinitely.
Otherwise, a nomination could legally expire after just three years under Regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth).
“There are a lot of ambiguous trust deeds out there which may accidentally opt into the three-year rule,” says DBA Lawyers Special Counsel, Bryce Figot.
“One important step, particularly after this High Court case, is to make sure if you want to have a binding death benefit nomination – the most common one for SMSFs – is that it’s going to last indefinitely,” Figot says.
“People might have invalid documents, which is a real shame because we now know that if you structure them carefully, they can last indefinitely.”
Preparing for the loss of capacity or death
Another key aspect for SMSF trustees and practitioners advising them is to ensure the right people take control of a fund in the event of member’s loss of capacity or death.
“There have been lots of cases over the years where someone wanted the money to go to a child from a previous relationship but, for example, the second spouse was controlling the fund and was able to frustrate the wishes of the deceased by physically holding the purse strings,” Figot says.
“It’s certainly worth asking, how are my facts going to play out if I lose capacity or die? Who’s going to be running the fund? Am I happy with this outcome?”
Trustees and their advisers should take the opportunity of conducting such forecasting to reflect any applicable trust deed wording around loss of capacity or death of a member, as well as any beneficiary nominations which are in place.
Reversionary beneficiary nominations
SMSFs can specify that a superannuation income stream will automatically transfer to a nominated dependant beneficiary upon a member’s death.
“So, for some people, they can be very important, particularly for those who have a high tax-free component and if they’re expecting a life insurance payout,” Figot continues.
Some SMSF deeds are worded such that they give priority to a reversionary pension nomination over a binding death benefit nomination, which can lead to conflicts after a member’s death.
“Reversionary beneficiary nominations are not necessarily needed for everyone with an SMSF, but for those wanting to implement them, it’s important to ensure they’re enforceable in the future,” Figot explains.
Documentation to withdraw member benefits
What documentation is needed to quickly withdraw benefits after a member’s death?
Figot says there’s a view that the settled position of the Australian Taxation Office is that a benefit payment should be treated as a member benefit where the member has requested the benefit payment before their death.
Notably, this is despite the benefit being paid after their death.
“In a practical sense, if someone is going to die some people want to pull money out sooner rather than later,” he says.
“But, if you start manipulating an elderly person’s assets to help the next generation, you’ve got to think about your obligations as a professional adviser.”
Managing conflicts after a member’s death
Figot says an important question for practitioners – particularly after an SMSF member’s death – is to determine which client you’re acting for.
“Accountants need to determine in whose interests they act. It’s very common for accountants to act for multiple parties, which is fine, but when you start to enter conflict territory you’ve got to be very careful.
“There have been accountants over the years trying to act for all parties, which can be very problematic.”
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Published in Investment Magazine (December 2020)