When a member of an SMSF passes away, payment of their death benefit can be problematic if their estate plan hasn’t been considered and implemented correctly. A most important part is to consider if a death benefit nomination (DBN) is appropriate for the member and whether it complies with the requirements of the trust deed. DBN’s can be both binding and non-binding, depending on the requirements of the deed and how they have been executed.

Some issues we’ve seen in court cases

Whilst binding death benefit nominations (BDBNs) typically lapse after three years, the trust deed may contain a clause allowing it to be a non-expiring BDBN. As illustrated in the recent case Hill v Zuda Pty Ltd (2021) WASCA 59, the court of appeal held that a BDBN could be valid for more than three years if the trust deed allowed. So, it is critical to review the deed when preparing a DBN to ensure they are both aligned.

Some estate planning strategies will have the member nominate their death benefit is to be paid to their estate, to be handled in accordance with their Will. However, a Will can only control the death benefit if there is a valid DBN which complies with the requirements of the trust deed. In the court case Loppolo and Hesford v Conti (2013) WASC 389, it was found that the surviving trustee was not bound to follow a direction in the deceased member’s Will, because there was no valid DBN in place instructing the benefit to be paid to the estate. Unfortunately, the deceased member had executed a Will to pay their death benefit to her children, however the surviving trustee decided to pay the death benefit to himself.

Finally, in Wooster v Morris (2013) VSC 594, we saw that a validly executed BDBN was not enough to ensure the death benefit was paid to the nominated beneficiaries without lengthy court proceedings. In this case, the surviving trustee appointed her son from a previous marriage as a new trustee and later appointed a corporate trustee of which she was the sole director. She then paid the full death benefit to herself, going against the instructions in the BDBN. Following substantial court proceedings, it was found that the BDBN was valid and should be executed accordingly. Unfortunately, by this point, almost half of the death benefit had been eroded by legal fees. There are a few key lessons we can take away from this case:

1. The legal personal representative does not automatically become trustee. Instead, this is determined by the trust deed.
2. Whilst a valid BDBN is helpful when dealing with a death benefit, it can take some time and resources to ensure it is paid to the dependents, leading us to the most important lesson.
3. Who holds the decision making power is critical in ensuring death benefits are paid correctly. Again, this is determined by the trust deed which may simply leave a remaining trustee as the sole decision maker.

Regular estate planning reviews

SMSF members are encouraged to regularly review their estate plan, particularly when there have been major life events, such as:

1. Commencing a pension;
2. Death of a spouse;
3. Marriage, particularly where blended families are involved;
4. End of a de facto relationship/divorce; or
5. Possibility of incapacity.

The above cases illustrate the importance of succession planning. A binding death nomination can be beneficial, however there is no assurance that it will be complied with. The trust deed must also be reviewed and, if required, updated to reflect the wishes of the members upon death.

If you have any other questions about managing your client accounts, please speak with Mark Phillips or Alex Polorotoff on 1300 364 597 or via email at mark.phillips@interprac.com.au or alex.polorotoff@smsfengine.com.au.