Avoid the estate planning scandal

Estate planning advice can be a windfall for practitioners, but it does not come without significant risk. Grant Abbott illustrates what can go wrong if all the necessary elements are not included.

1. The scandal

I don’t know if you saw the news article below, but although it was published on 1 April, it was not an April Fools’ Day joke. It certainly gives lawyers a terrible name. It was published in Perth Now on that day and read as follows:

A Supreme Court judge has launched a scathing attack on lawyers who “feasted” on a small family estate with their “indefensible” legal fees, describing it as a “scandal” that brings the profession into “disrepute”.

Justice Jeremy Curthoys’ withering takedown was aimed at the lawyers involved in the case of Angela Miller, who was contesting the will of her late de facto partner Andre Taylor, who left his entire estate – worth about $600,000 at the time of the three-day trial last October – to his two adult children, Elizabeth and Philippe.

In a recent judgment, it was revealed the combined legal costs were potentially more than $500,000 – in a case involving six lawyers, one from interstate, but which only should have had two, according to the judge.

The small estate had been “ravaged” by legal fees, he said.

2. Estate planning litigation is coming to an SMSF near you

I have great respect for the legal profession, however, there are always cases where a fetid dispute between warring parties leads to months and years of long litigation. This is particularly the case where family emotions and money are in the mix. The classic two instances of divorce and death come to mind and are big fee earners for lawyers. And the bigger the estate, the more disputing parties will seek to grab their share of the pile, goaded on by lawyers and open engagement agreements.

With the average size SMSF now at $1.2 million, death benefit challenges are a honey pot for litigation lawyers. Although I have to say that at this time, SMSF savvy litigation lawyers are few and far between, but they are coming soon and hard. You can see how some legal firms have changed the disability claims environment for retail and industry super funds and with the Australian Financial Complaints Authority (AFCA) soon to be looking after superannuation complaints, a ramp up in superannuation estate planning actions will ensue.

When it comes to SMSF estate planning litigation, SMSFs are not immune and all SMSF advisers, accountants and administrators need to learn the SMSF estate planning ropes, pitfalls and traps to protect their clients’ wishes and more importantly their personal finances and career. I am here to tell you that if something goes wrong, the adviser will become the target of angry dependants and family. And one thing with SMSFs and estate planning, there is a whole lot of things that can go wrong.

3. The perils of SMSF estates and professionals

I don’t want to put too fine a point on it, but I can guarantee if I looked under the hood of your clients’ SMSF estate plans or lack thereof, I would find a lot of pistons missing. We know it and that means trouble. Just look at what happened to the Andre Taylor estate above, and that was a lot smaller than many SMSF estates our clients are sitting on.

In terms of SMSFs, I have been there from the start and have seen just about everything, and by far the weakest link for most SMSFs is estate planning, particularly now that recommending a client to complete a binding death benefit nomination (BDBN) is a financial product for the purposes of the Corporations Act 2001. This means any professional, administrator, accountant or financial planner recommending or helping a client to complete one needs to be licensed and also needs to issue a statement of advice (SOA). That’s right, an SOA to complete a BDBN.

I can recount so many stories of dire, wrong and potentially criminal action by accountants and lawyers trying to fix up an SMSF estate after the event when what they thought they had put in place came crumbling down under legal scrutiny. It’s a simple fact that for many accountants, financial planners and estate planning lawyers, when it comes to SMSF estate planning, they don’t know what they don’t know. So they end up falling over themselves trying to distribute an estate without regard to the trust deed, superannuation law or the strict liability provisions of section 55(3) and section 218, plus the criminal consequences of section 201 of the Superannuation Industry (Supervision) (SIS) Act 1993. If only they knew their professional lives, finances and assets could go up in a puff of smoke from their actions or inactions, they would be running for the hills.

Here’s the truth about what you need to know

With so many different clients and the wide range of family circumstances, SMSF estate planning is a challenge; exciting but a real challenge, not for the faint-hearted, and definitely not for those ignorant of the law. So here’s the truth. Do the training time and take advantage of being able to do a great SMSF estate plan and also rip to shreds a poor one, or that of a competitor. If you are not interested in doing any specialist training, then don’t do any SMSF estate planning, don’t even mention it, because you will be exposed. Even recommending to a client that they complete a death benefit nomination potentially breaks so many laws, not only the SIS Act, but also the Corporations Act 2001.

4. Donovan v Donovan, an Andre Taylor SMSF equivalent

Now you might be saying at this juncture, well the Andre Taylor case in Western Australia was an estate planning case and not about SMSFs. And I would say back to you: “Thank goodness as the legal bills would have been double.”

At the core of SMSF estate planning is not only succession law, but state-based trustee law, the SIS Act, state-based family provisions or dependants acts, the Income Tax Assessment Act 1936 and 1997, and the Corporations Act 2001. The Andre Taylor case was a walk in the park and for the legal profession an SMSF estate planning case can be a lot more profitable in terms of billable hours. Just researching all that law, the deeds, trustee actions and advice provided or omitted, plus a Supreme Court date racks up an easy $100,000. In my opinion, the amount of assets of some bigger clients makes the chances of an Andre Taylor case happening high.

Review of Donovan v Donovan [2009] QSC 26

This is a great starting case for anyone dealing with an SMSF, and this does not exclude auditors or administrators. Section 55(3) of the SIS Act puts advisers right in the firing line. To see how this section works, look at Dunstone v Irvine where in excess of $300,000 was awarded as damages on a $1.6 million SMSF litigation.

In Donovan’s case, Ronald Donovan wrote a letter to the trustee of his SMSF directing, in a binding fashion, “the balance of any amounts standing in my name in the above named superannuation fund, on my demise, be paid to my legal personal representative for inclusion in my estate assets”.

The plan for the estate, which was to include Ronald’s superannuation benefits, was to split it evenly between Helga, his current spouse, and Lynda, the daughter from his first marriage. Both Lynda and Helga were executors of Ronald’s estate, so there would be no arguing as to how the estate would be divided, including the SMSF proceeds. Right down the middle as Ronald wanted.

However, Helga had other ideas plus a good lawyer who argued the letter Ronald sent to his lawyers was non-binding, and as Helga was the only remaining director of the corporate trustee, she had carte blanche to do whatever she liked with Ronald’s SMSF money. That included paying it all out to her and not to the estate.

The result? Helga won and all the legal fees were to be paid out of the estate and Ronald’s daughter, Lynda, not only received no super, but the legal fees ate into the legal estate.

Here are my takeaways on Donovan for all SMSF professionals – planners, accountants, auditors and administrators.

• It is not said in the case as to who helped, instructed or completed the letter to the trustees of the SMSF for the distribution of Ronald’s superannuation benefits on his death. It had to be touched by some adviser, accountant, planner or lawyer. After all, an SMSF member does not wake up one morning and think: “I better prepare a binding letter for my SMSF monies in case I die.” And that is all important because whoever provided the advice for this process is in a dire vortex of their own making. If that case was heard now, AFCA and the Supreme Court would be busy. Was there an SOA and what was the exact advice?
• Justice Fryberg of the Queensland Supreme Court started his investigation with the fund’s trust deed and in particular the rules of the fund enabling the member to complete their SMSF estate plan to “designate a dependant or legal personal representative of the member as the person entitled to payment of the death benefit in writing to the trustee in such form as the trustee may from time to time approve”. Fryberg called for all documents relating to the fund, but could not find any form approved by the trustee for the disposition of Ronald’s superannuation benefits – no form, no binding nomination. I still don’t understand how the person advising Ronald did not read the deed and follow its process. It is mind-numbing.
• The fallback position, which should be tattooed on every SMSF adviser’s arm, is that “if nothing is binding on the trustee, then the trustee has full discretion”, even to award the deceased member’s death benefits to themselves, as was the case in Donovan. So if the adviser tells the client the nomination is binding, they should make sure it actually is.
• Interestingly and quite prophetically, Fryberg made the following comments on the superannuation laws: “The legislation governing superannuation in Australia is notoriously convoluted and is reminiscent of the legendary oomidoodle bird. It is very easy for trustees and members to make a mistake about the requirements applicable in their particular case.”  And it is because the laws are so hard to understand and follow that section 55(3) of the SIS Act enables a member, their beneficiary, their estate or the trustee to recover damages from an accountant, administrator, auditor or lawyer that breaches the laws, deed or regulations causing loss or damage. By the way, this is a strict liability provision and no negligence is required. You breach, you pay.

The final word

I am not here to discourage practitioners from advising on SMSF estate planning or SMSFs in general; more to make sure they realise it is a specialisation and a great fee-for-service revenue earner, but a real challenge. Time must be spent on real training, not just general stuff you can read on the internet.