Wills & Estate Planning

This Article has been adapted from a presentation that the author made for the Law Society of NSW in their Elder Law, wills and Probate: One day Intensive on 12 March 2024

Introduction

Since the introduction of compulsory superannuation contributions in 1992 the superannuation industry has grown to become a $3.5 trillion industry as at June 2023.  Of that total amount approximately $884 billion are held in self-managed superannuation funds (SMSFs).

For any estate planning lawyer it is crucial to consider as part of the estate plan what will happen to a client's superannuation death benefit upon their passing.

Who can legally receive a superannuation death benefit

A member's superannuation death benefit upon their passing is not an asset of the deceased member's estate.  There may be some instances where the superannuation death benefit will be paid into the member's deceased estate in which the provisions of the member's will or the rules of intestacy would apply in respect of how the superannuation death benefit will be distributed.

At law, the trustee of the superannuation fund can only pay a deceased member's death benefit to persons who fall within the definition of "dependants" as provided for in the Superannuation Industry (Supervision) Regulation 1994 (SISR) in regulation 6.22 which provides that in section 10 of the Superannuation Industry Supervision Act (SIS Act) that a dependant includes:

• spouse;
• child;
• somebody in an interdependency relationship with the member; and
• "ordinary meaning" of dependant.

If there is no valid binding death benefit nomination (BDBN) in place at the time of the member's death and there are more than one dependants of the deceased then the trustee  of the fund has full discretion in determining whom within the class of dependants will receive the death benefit and in what proportions.  Alternatively if there is nobody whom satisfies the definition of a being a dependant of the deceased then the trustee of the fund can pay the death benefit to the member's deceased estate.

Rising disputes involving superannuation death benefits

It is becoming increasingly common for disputes to arise in relation to the distribution of a deceased member's superannuation death benefit.  The increase in disputes involving superannuation death benefits can be attributed to a number of factors which include:

• the trend for superannuation death benefits to be of increasingly large amounts and this is in line with deceased estates generally being larger in size;
• lack of awareness or understanding by people that superannuation does not form part of your estate upon your passing despite having a will in place which can cause confusion as there are different rules for how a superannuation death benefit will be distributed as compared to the distribution of your estate assets
• even when there has been an attempt to put in place a BDBN the form has not been executed validly or is invalid for some other reason.

BDBNs

A member of a superannuation fund can put in place a BDBN which directs where they want their death benefit to be paid to either it can be paid to dependant/s or it can be directed to their estate (which the provisions of their will would then take effect).

There are formal requirements of a BDBN that must be met for the BDBN to be valid.

In the SMSF context the BDBN also needs to follow strict compliance with what the trust deed for the SMSF specifies in relation to BDBNs.

If the BDBN is not valid for whatever reasons or there is simply no BDBN then this can lead to costly and protracted disputes.

Below are just some of the notable cases in this area dealing with SMSF:

• The starting case in this area is Katz v Grossman [2005] NSWSC 934.  In this case the deceased had a son and a daughter and he made it clear in his will that he wanted his estate and he intended this to include his superannuation to be distributed equally between the son and the daughter.  The deceased did not having a valid BDBN in place at the date of his death.  The deceased held approximately $1 million in a SMSF and upon his passing the daughter ended up as the sole trustee of the SMSF and made the decision by exercising her trustee discretion to pay her late father's entire death benefit to herself.  This was held to be a valid exercise of the daughter's trustee discretion.
• The case of Munro & Anor v Munro & Anor [2015] QSC 61 involved a BDBN that was in place in relation to the deceased member of his SMSF but in the BDBN he nominated that he wanted his death benefit to be left to the "Trustee of Deceased Estate."   This was held to be invalid on the basis that under the law a superannuation death benefit can only be paid to "dependants" or to the deceased's legal personal representative.  As the terminology used in the BDBN "Trustee of Deceased Estate" does not mean the same as the legal personal representative this BDBN was held to be invalid.
• The more recent case of Williams v Williams [2023] QSC 90 involved a dispute around whether the BDBN was invalid because it could not be established that the BDBN had been served appropriately upon all the trustee of the SMSF.  Pursuant to the terms of the trust deed in question the BDBN needed to be served upon all trustees of the fund and it could not be established that the required notice was given to all the trustees therefore the BDBN was held to be invalid.

Take home points

It is now more than ever, imperative that clients need to be advised in relation to the distribution of their superannuation death benefits.  If the client have a SMSF then extra care needs to be taken in reviewing the relevant trust deed governing the SMSF to ensure that the BDBN is effective and valid.  With an increasing amount of a client's wealth tied up in superannuation this needs to be an area where practitioners are focused upon.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.