Superannuation death benefit disasters
In this article we outline three recent cases where unexpected outcomes have resulted from people not understanding the workings of their self-managed super fund (SMSF). Our fourth case highlights how a lack of appreciation of the laws of intestacy (dying without a valid Will) and the responsibilities of a legal personal representative (LPR) can cause unintended outcomes.
Ioppolo v Conti 1
Mrs Conti and her second husband were members and individual trustees of an SMSF. Mrs Conti had made a number of death benefit nominations over the years in favour of her husband but as at the date of her death there was not a valid binding death benefit nomination in place.
Mrs Conti's Will requested that all of her SMSF benefits were to go to her adult children and specifically stated that her husband was not to receive any proceeds of the SMSF death benefit.
Mrs Conti's children from her first marriage were the executors of her estate however they were not appointed as trustee of the SMSF. The SMSF trust deed allowed a surviving trustee to appoint a new trustee. Mr Conti appointed a corporate trustee, of which he was the sole director.
The trustee then considered the payment of the death benefit and resolved to pay the entire benefit in favour of Mrs Conti's husband. Although the trustee identified the adult children as potential beneficiaries, it was determined to pay the death benefit to the spouse (a common outcome).
The children applied to the court and of course were unsuccessful, as a Will cannot deal with superannuation unless the trustee of the superannuation fund determines to pay the benefit to the estate. Again, it would be uncommon for a trustee to make such a determination when a spouse was identified. The court held that the trustee of the SMSF could pay the death benefit to Mr Conti.
Clearly the outcome would have been different if the children, as LPRs had been appointed as trustee of the fund. It is essential that we understand who will be in control of the SMSF after we die and amend the trust deed and/or corporate trustee constitution if required.
Wooster v Morris 2
Mr Morris and his second wife Mrs Morris were members and individual trustees of an SMSF. Mr Morris had a binding death benefit nomination in favour of his children from his first marriage.
The children were the executors of Mr Morris' estate however they were not appointed as trustee of the SMSF. The SMSF trust deed allowed a surviving trustee to appoint a new trustee. Mrs Morris appointed her son from a previous marriage as trustee and subsequently appointed a corporate trustee, of which she was the sole director.
The trustee considered the payment of the death benefit and resolved to pay the entire benefit in favour of Mr Morris' spouse, after deciding that the binding death benefit nomination in favour of the children was not valid. The children applied to the court and the court determined that the death benefit nomination was binding and ordered that the benefit be paid to the children.
Despite the existence of a binding death benefit nomination, it took over three years for the children to receive the death benefit. In this case, the final outcome would have been the same if the children, as LPRs had been appointed as trustee of the fund, however it would have been achieved far more quickly and with less pain and expense.
Munro v Munro 3
Mr Munro and his second wife Mrs Munro were members and individual trustees of an SMSF. Mr Munro was a solicitor who completed a binding death benefit nomination for his SMSF benefit to be paid to 'Trustee of Deceased Estate'.
Mr Munro died and the executors of Mr Munro's estate were Mrs Munro and his two daughters from his first marriage. Mrs Munro appointed her daughter from a previous relationship as the co-trustee of the SMSF, as permitted by the fund's trust deed. The trustees determined that the death benefit nomination was not valid and they resolved to pay the benefit to Mr Munro's spouse.
The children applied to the court and the court determined that the death benefit nomination was not binding. Both the SMSF trust deed and superannuation law allow a death benefit to be paid to a deceased's LPR. However, the court found that the nomination of 'Trustee of Deceased Estate' was not the same as nominating the LPR since the role of the LPR is different to that of trustee.
It is essential to ensure that the correct terms are used when intending to have the super death benefit paid to and distributed via the estate.
James McIntosh was a single 40 year old man living with his mother when he died. His parents, Mr and Mrs McIntosh divorced when James was young and he had not had regular contact with his father since he was seventeen.
His mother successfully applied for letters of administration making herself the LPR of the estate. Under the laws of intestacy, both parents were entitled to 50 per cent of the estate. James had approximately $80,000 of estate assets. He also had three superannuation funds with benefits of approximately $450,000. Mrs McIntosh was the nominated beneficiary (non-binding) for all three funds.
Mrs McIntosh applied to each of the three funds to have the superannuation benefits paid to her personally on the basis of an interdependency relationship. There was no dispute about the fact that there was an interdependency relationship, and each of the funds made payment directly to her.
The estranged father said he should have been paid half of the superannuation benefits under intestacy laws. In Queensland, the law provides that where a person without a Will dies leaving no spouse or children, each parent is entitled to 50 per cent of their adult child's estate.
The court found that in applying for letters of administration Mrs McIntosh had put herself in a position where she owed a fiduciary duty to Mr McIntosh.
The failure of Mrs McIntosh to apply for payment to the estate was in breach of her fiduciary duty to act in the best interests of the estate. The court found that she should have applied for the superannuation benefits in her capacity as the LPR of the estate not in her personal capacity. She was directed to pay 50 per cent of the superannuation proceeds to Mr McIntosh.
If Mrs McIntosh had been appointed as LPR of James' estate via his Will, she would likely have not been required to pay 50% of the superannuation benefit to Mr Mcintosh. It is an important distinction, as the testator could have knowingly appointed someone with a potential conflict of interest. Similarly, she could have retained 100% of the superannuation benefits if she had allowed Mr McIntosh to apply for letters of administration and become the LPR. In this instance, Mr McIntosh would have also had the fiduciary obligation to try and bring the super monies into the estate.
However, when he made an application to the superannuation funds for payment of the death benefit, he would have found that payment had already been made to Mrs McIntosh as an eligible superannuation dependant.
The above examples highlight how important it is for your clients to have a proper estate plan in place. Disastrous consequences can occur, not only in terms of unintended distribution of wealth but by imposing unnecessary stress and expense on those left behind.