SMSF advisers and accountants should consider whether low-cost, simple death benefit strategies created in-house are in the best interests of their clients, particularly where complex family arrangements may be present, a lawyer has warned.
DBA Lawyers special counsel Bryce Figot said while these reasons seemed sensible during the planning stage, when tested they often created problems for the adviser and the client.
Figot gave the example of a financial adviser, Belle, whose client, Joanne, had a second spouse and a child from a prior relationship. Belle drafted a reversionary pension to the second spouse and a binding death benefit nomination (BDBN) that said 100 per cent of benefits would be paid to her child.
“Belle thinks or assumes she’s being clever because the pension will just go off to the second spouse and the BDBN will only operate with the remaining benefits, and the deed says the pension documents override the BDBN,” he said in an online briefing last week, noting these actions have created a range of problems.
“Here’s a technical problem. Has Belle engaged in legal practice? It is highly probable and it could go from being a technical problem to a real problem when she gets sued. She will have no professional indemnity cover as she won’t be covered for doing legal work.
“A practical problem is that Belle is setting up a situation whereupon Joanne’s death, the child is going to see a document their late mother signed saying ‘I want my child to receive 100 per cent’ and they’re not going to receive that amount. You could foresee they are going to be upset about it and that document is putting fuel on the fire.”
He said Belle should have engaged with a specialist lawyer to create a strategy and documents that would avoid any problems for her and her client.
“What if Belle had recommended to Joanne that Belle engage a lawyer who drafts a tailored BDBN which provides that the second spouse receives the pension and the child from the prior relationship receives the balance,” he added.
“In this circumstance, is Belle engaged in legal practice? No, she’s just given her thoughts with appropriate disclaimers.
“Upon Joanne’s death, will Joanne’s child be more accepting of a document signed by their late mother saying they only receive some super? Most likely.
“So why might Belle be reluctant to implement this solution I’ve just described.
“Typically, I find it’s a combination of wanting to reduce legal fees for her client, to keep it all in-house and to keep things simple for the client.
“On the one hand, each of those goals is commendable. On the other hand, ultimately, none of those are good reasons.”
