Katz on a hot tin roof, Wills and superannuation revisited

Sep 27, 2017, 16:31 PM

By Mark Ellem

Mark Ellem SuperConcepts SMSF Expert

“Nominated de facto gets super over the deceased’s natural children”.

We’ve seen that headline many times before, but it highlights the importance of which assets are part of your estate and those which are controlled by the super fund on your death. Your Will cannot direct the trustee of your superannuation fund about how your super should be paid upon death.

A recent case involved the tragic passing of a 40-year-old father of two young daughters. At the time of his passing, he was in a relatively new de facto relationship with a woman who was not the childrens’ natural parent. His Will left all of his estate, including his superannuation to his daughters.  However, his de facto lodged a claim that she was his ‘partner’ and received the majority of his superannuation benefits. In fact, out of the $451,498 total superannuation death benefit, his daughters received only $49,664 each, with $352,170 going to his de facto.

There are similarities between this case and that of Katz v Grossman which was decided over 10 years ago, in 2005. The case involved Mr Katz who was the sole member of his SMSF and was one of two individual trustees, the other being his wife. On the death of his wife, his daughter, Mrs Grossman, was appointed as second trustee. Mr Katz’s Will left his entire estate, including his superannuation entitlements of about $1 million to his two adult children, daughter and son, on a 50/50 split. On the death of the father, the sole remaining trustee, Mrs Grossman, appointed her husband as the second trustee and they chose not to follow Mr Katz’s wishes in his Will, but instead paid the entire superannuation death benefit out to Mrs Grossman. That is, the daughter received 100% of the father’s death benefit and his son received nothing.

Whilst these cases are some 12 years apart, it highlights the importance of which assets come under the authority of your Will and those that relate to the superannuation benefit. In particular, a Will cannot direct the trustee of a superannuation fund in relation to the payment of your benefit from the fund upon death. In essence, an indication of how superannuation should be treated in your Will can act as a form of non-binding death benefit nomination, which is merely a wish as to the direction of your death benefit and nothing more. The provisions of the trust deed of the superannuation fund take precedence over any instructions given in a Will as to how the death benefit should be paid by the fund.

Binding Death Benefit Nominations

A validly completed binding death benefit nomination (BDBN) will bind the trustee of a superannuation fund to the payment of a member’s superannuation entitlement upon death. However, it is important to ensure that the BDBN has been correctly completed and that the nominated dependant(s) are also valid. Generally, a superannuation dependant is a spouse, child (of any age) or the Executor of the deceased’s estate. There are also some other categories, such as ‘financial dependant’ and an ‘interdependent’. Further, don’t confuse a superannuation dependant with a tax dependant – that’s for another article.

However, a BDBN is not the ‘be all and end all’ of estate planning for superannuation. Another relevant case, particularly for SMSFs, is that of Wooster v Morris in 2013. That case involved a two member-SMSF. The husband provided to the trustee a BDBN, nominating his two daughters from a previous marriage as his dependants to receive his superannuation benefits upon his death. He died and his second wife (not the natural parent of the deceased’s daughters), together with her son (not the deceased’s son) decided to disregard the BDBN and effectively pay the death benefit to herself. Some years later, the court affirms the BDBN as valid, however, legal fees have mounted and the second wife has died, leaving her own estate bankrupted. In the end, the eventual payment to the daughter is well short of what they would have received had the BDBN been accepted in the first instance.

It’s all about control

Remember that saying “possession is nine-tenths of the law”? Well, when it comes to death benefits being paid from an SMSF, who controls the fund on death can be everything. If the father in the Wooster case did not want his second wife to receive any of his superannuation on death, maybe he should have considered not having her as party of the fund, either as trustee or member/trustee. A well-constructed BDBN can help provide sound succession planning and inter-generational wealth transfer, however, when it involves an SMSF, knowing who is in control of the SMSF at the time of death is paramount.

Time for a review of your Estate Plan

Whilst the thought of our demise is not one we wish to dwell on, it is important that we have in place our Estate Plan. This plan is not simply a Will, but starts with the overall view of what we want to happen to our assets in the event of our death. Who do we want to benefit and how are they to benefit – lump sum of money/assets or an income stream? Once we know that, we can engage professionals to put in place the relevant documents for it to be implemented.  Relevant documents maywill include: Will; BDBN; Enduring Power of Attorney; Testamentary Trust provisions in a Will; Superannuation Proceeds Trust provisions and any special provisions in an SMSF Trust Deed

Superannuation is becoming one of the largest, if not the largest asset we have and it is important, in fact it’s our duty, to preserve it for those who we want to benefit from it after we leave this mortal coil (assuming we haven’t spent it all!). A Will does not, on its own, provide the mechanism to ensure that the distribution of superannuation as intended actually takes place. If there’s one take-away from this article, it is that a Will has no power over the decisions of trustees of a superannuation fund when it comes to the payment of death benefits.