It is vital for self-managed super funds to consider their estate planning requirements and understand they may have to take additional steps when compared with those in an APRA fund, Anna Hacker writes.
Estate-planning implications would probably not top the list of considerations for those deciding whether to set up a self-managed superannuation fund (SMSF) or use an Australian Prudential Regulation Authority (APRA) supervised superannuation fund (ASSF), but it is an important aspect that should not be overlooked.
It is particularly important to pay attention to the superannuation estate planning requirements of blended families, and those with SMSFs have additional steps to consider when ensuring their estate is distributed in the way they intend.
Although set up as a way to control wealth during a person's lifetime, an unintended outcome of establishing an SMSF is that your estate does not always end up in the hands of who you want it to. This is particularly the case with blended families.
Although this risk also exists for ASSFs, it is higher with SMSFs, because people are dealing with their own family.
One way around this is to set up multiple SMSFs, with the second spouse in control of one of the SMSFs and the adult children in control of a second one.
Although it seems an extreme measure, the court cases keep showing that issues tend to arise after someone has passed away, particularly with blended families. And more generally, that legal agreements that were considered valid and watertight, are not.
The case of Katz v Grossman1 is a classic example. Mr and Mrs Katz were individual trustees of their SMSF. Mrs Katz passed away and Mr Katz appointed their daughter, Linda Grossman, as the second individual trustee. Mr Katz prepared a non-binding death benefit nomination in which he divided his superannuation death benefit equally between his two children, Linda and Daniel.
The balance of the non-superannuation assets in estate (covered by his will) was also left equally to the Linda and Daniel.
However, when Mr Katz passed away, Linda appointed her husband as the additional trustee, and they made a decision to pay the entire death benefit to Linda only, ignoring the wish contained in the nomination.
Daniel Katz appealed but was unsuccessful in obtaining half of the superannuation monies. Although this was clearly not what his father has intended, Linda and her husband were able to ignore his death benefit nomination as trustees with full discretion and pay all of the superannuation assets to her. This was in addition to half of the non-superannuation assets in the estate.
To guard against this, nowadays we would advise clients to look at the whole estate and to consider putting an equalisation clause into their will, just in case. This basically means there is a method of calculating the value of whole estate - including the superannuation and all other non-estate assets - and dividing it accordingly.
In this case it would have meant that, as Linda should have received 50 per cent of the total pool, and as she received all of super, the remaining estate would go to Daniel. While it still did not provide complete equalisation, it is a better outcome for Daniel than what did occur.
So while we cannot always predict and control what will happen in the super environment, including such an equalisation clause in the will can ensure that the non-super assets are also considered as a whole in the overall picture.
One of the problems in Katz vs Grossman was that the trust deed was an old one. These days, the trust deed could have been changed during Mr Katz's lifetime to ensure that he could make a binding death benefit nomination (BDBN) that the trustee, being Linda and her husband, could not ignore.
It is quite common for people to be operating SMSFs with old trust deeds that have not been updated. For this reason, one of the first things to consider is updating the trust deed if clients have an old one, as the old trust deeds just do not include things that the more recent ones do, like BDBNs.
Another important factor to be aware of is that an attorney can step in if the SMSF trustee loses capacity, if no-one else is authorised to do so. So it is important to think about whether someone should be nominated to take control or a different process be detailed in the trust deed if the trustee loses capacity.
Once the attorney steps in and takes over, the attorney then gets to make whatever decisions they want. Although they need to consider the best interests of the donor of the power of attorney, they still get the power of control over the assets. This could be a problem if the attorney is not someone who would ordinarily be chosen to control the SMSF.
Trustees of SMSFs and their advisers also need to make sure there are not multiple attorneys nominated. This can create difficulties, as only one person might be appointed.
Impact on estate planning
It is important to consider the impact of estate planning across all assets that are held, and not just each type of asset in isolation. For instance, an SMSF should not be established without understanding how it impacts on the rest on the estate plan.
For instance, a BDBN, on its own, should never be considered a solution. It should always be done in consideration of the wider context of estate planning. Common mistakes that have been made include nominating someone who is not actually a beneficiary, or making a nomination that has the effect of undoing everything else that is done in the will.
The case of Ioppolo & Hesford v Conti2 provides a good example.
Mr and Mrs Conti were the members and trustees of their SMSF. Mrs Conti had four children from a previous marriage. She had previously made a BDBN directing her death benefits be paid to her husband, but that nomination had lapsed. Her will provided that her super entitlements be paid to her children (contrary to her death benefit nomination).
On Mrs Conti's death, Mr Conti became the sole member and trustee. He resigned as trustee and appointed a company to be trustee of the fund. The trustee then paid the death benefit to Mr Conti. Two of Mrs Conti's daughters were executors of her will and argued that they should be appointed as trustees of the SMSF. This was denied and the death benefit was able to be paid out to Mr Conti.
Paying super to estate
One option to guard against unintended consequences is to pay the superannuation benefit to the estate. The advantage of this approach that it is no longer necessary to constantly think all the time about superannuation and whether a beneficiary is still dependent, and what to do if that changes.
If it is directed to the estate, however, it is important to ensure that there is flexibility in the will so that the executor can decide who gets what. If it is a really simple will and the superannuation is sent into the estate, and if (say) two of the four beneficiaries are tax dependents, it would be taxed on 50 per cent because 50 per cent is going to non-tax dependents.
If however, the will gave the flexibility for the executors to allocate whichever assets they want to each of the beneficiaries, it means the executors can decide (say) that those two are tax dependent so they get the superannuation, and the other beneficiaries will be "topped up" by other assets, so the maximum of the concessional taxed super environment is achieved.
Any decision to direct superannuation death benefits to an estate must be considered in light of whether that estate is potentially going to be challenged as those situations would be best served by reducing the pot in the estate to as little as possible.
Considerations for ASSFs
It is not just SMSF funds that need to consider estate planning. Many of these issues are also applicable to ASSFs.
It is important to ensure all technical requirements of binding death benefit nominations are fulfilled - even small ones can trip up the estate planning.
There have been cases in the superannuation complaints tribunal where the BDBN has been found to be invalid for simple typographic errors or terminology mistakes. If the BDBN is just sitting in a desk at home, it is not valid - the fund has to have received it and the fund has to have acknowledged it has been received.
The main thing is to ensure how death benefits are paid is understood, as the super fund trustee has a lot of power.
It is a consideration for SMSFs as well. Some trust deeds - not all - state that the trustee of the fund must receive the BDBN. The case of Wooster v Morris3 illustrates this well.
Mr & Mrs Morris were the two members of their SMSF. It was the second marriage for both and they had no children together. He had two daughters from his first marriage and she had one son from her first marriage.
Mr Morris made a BDBN in favour of his daughters. After he died, Mrs Morris appointed her son as a co-trustee. The new trustees then sought advice as to whether the BDBN was binding. The trust deed provided that the nomination must be delivered to the trustee.
Although Mrs Morris, in her personal capacity, had the BDBN in her possession, it could not be proved that the trustee had received it. Advice was received that the BDBN was not valid, and therefore not binding on the trustee. A corporate trustee was then appointed who decided to ignore the BDBN - all the death benefit was paid to Mrs Morris.
This could have been avoided if there had been minutes of the trustee meeting, which confirmed that the BDBN had been received and accepted by the trustees.
Anna Hacker is the national manager – estate planning at Equity Trustees Limited.
1. Katz v Grossman  NSWSC 934
2. Ioppolo & Hesford v Conti  WASC 389
3. Wooster v Morris  VSC 594