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How discriminatory can a BDBN be?

How tailored can a binding death benefit nomination document be?

Binding death benefit nominations are made to ensure a member’s superannuation benefits are distributed to the right people. Julie Hartley looks at just how tailored this document can be.

So we all know what a binding death benefit nomination (BDBN) is and what happens if a member does not have one. We also know it is either lapsing or non-lapsing, depending on the provisions of the trust deed of the fund and it is a vital document that should be prepared as part of the estate planning strategy for each member of the fund and not by itself.

But have we ever put ourselves in the shoes of the maker of the BDBN, that is, the member of the fund? Have we ever considered whether there are any obligations or restrictions imposed on the member in the exercise of their right to make a BDBN? For example, if one of the adult children struggles to keep a job for more than two months, while their siblings have fantastic careers, does the member have an obligation to allocate a higher percentage of their benefit to that child so it is fair? Can a member impose conditions a beneficiary must meet before being able to receive the money? Or if one of the member’s children is married to someone much younger and the member decides to cut that child out of the nomination on the basis that their spouse is a “gold digger who’s just waiting to get their hands on their super benefits”, can the child challenge the nomination? Let’s look at a case study to try and figure all of this out.

Jeff and Lisa have six children: Stanley, Sarah, Laura, Edward, Helen and Peter. Jeff and Lisa are the two members and trustees of an SMSF. As part of his estate planning, Jeff decides to sign a BDBN allocating his super benefit in the following manner:

  • To my spouse, Lisa: 20 per cent
  • To my children:
    • Sarah: 20 per cent
    • Helen: 20 per cent
    • Edward on the condition that he formally and legally changes his name to ‘Dirt Bag’: 20 per cent.
    • Laura on the condition that she ceases to be an atheist and becomes a Catholic: 20 per cent.
  • If either Edward or Laura does not satisfy their relevant condition within three months of my death, their share is to be distributed equally between Lisa, Sarah and Helen.
  • I purposely exclude two of my children, Stanley and Peter, from this nomination as I do not wish them to receive any of my super benefits.
  • Family members have overhead Jeff say he excluded Stanley from his BDBN because he is a smoker (of which he disapproves) and Peter because of his homosexuality.

At the time of Jeff’s death, the balance of his superannuation interest is $350,000, Sarah is unemployed, having been unable to keep a job for longer than a couple of months in the past five years, while Helen is the chief executive of her thriving multi-million-dollar business.

...we should look at what is the source of a member’s right to make a BDBN. This right does not come from superannuation laws; instead it comes from the rules of the fund, which must expressly permit the member to make a binding nomination.

We assume the BDBN meets all the trust deed and statutory requirements for a valid nomination.Can any of the children challenge the substance of the nomination? This could be in an effort to increase their share, remove a condition, invalidate the nomination or be included in it in the absence of any technical defects.

What is the source of a member’s right to make a BDBN?

Firstly, we should look at what is the source of a member’s right to make a BDBN. This right does not come from superannuation laws; instead it comes from the rules of the fund, which must expressly permit the member to make a binding nomination. Provided the nomination is valid and enforceable, the trustee then has an obligation to comply with the direction.

The governing rules will also dictate whether the nomination is lapsing or not.

Are there any restrictions on their rights?

There are a few limitations to a member’s exercise of their right to make a BDBN. Obviously the first restriction is that the nomination must only nominate people who are within the class of eligible beneficiaries. To the extent that a nomination includes non-eligible beneficiaries, it will be invalid and not binding on the trustee.

As a quick reminder, eligible beneficiaries are:

  • a dependant of a member: that includes a spouse (whether married or de facto), children of the member (regardless of their age) and anyone who is financially dependent on the member or has an interdependency relationship with the member, and
  • the legal personal representative: being the executor under a will or an administrator of the estate.

Also, while a member can include as many (or few) people as they wish in their BDBN, the various percentages attributed to each beneficiary must be clear and the aggregate of the percentage must add up to 100 per cent, unless the trust deed of the fund specifically states otherwise.

Another restriction is that the nomination must meet the requirements of the trust deed in order to be valid.

So, unless expressly stated in the trust deed, there is no obligation on the member to include certain people, or class of people, in their BDBN. It is entirely up to the member to decide to whom their super benefits are to be distributed.

Can a member make a conditional BDBN?

If the trust deed expressly permits this type of tailored BDBN, then the answer is yes. If it is not expressly permitted in the trust deed, the rules could be amended to insert the relevant power.

If there is already an express provision to that effect in the trust deed, it is completely open to a member to impose special condition(s) or restriction(s) that a beneficiary has to satisfy before they can receive their share under the BDBN. The trust deed should specify how the share of the beneficiary who does not satisfy their relevant condition is to be distributed, that is among the existing nominated beneficiaries or to another person.

One may wonder whether a condition could be void on the grounds of being uncertain, impossible or contrary to public policy. While there is no case law on this issue in relation to BDBNs, it has been considered in the context of wills.

In the 2014 case of Hickin v Carroll & Ors (No 2), the New South Wales Supreme Court held the fact that the performance of the condition is out of the person’s power, or even out of any human power, or improbable, does not mean the condition is impossible.

It further stated that a condition which requires a person to embrace or renounce a certain religion will also be upheld as valid unless it is against any other aspects of public policy. That is because a person’s right to dispose of their goods to whomever and however they choose takes precedent over this type of restraint. Examples of public policies that cannot be interfered with are the right of a parent to raise their children in a particular faith or the preservation and maintenance of marriage. The NSW Supreme Court has held that the maintenance of family relations as a public policy has not yet been recognised.

Assuming the same approach is taken by the courts with regards to a BDBN (as they are likely to), it appears as long as a condition does not offend any public policy, it will be upheld by the courts, notwithstanding how impossible, improbable, unreasonable and burdensome it may seem.

It should also be noted a condition that indirectly contravenes the Superannuation Industry (Supervision) (SIS) Act will most certainly be void. So if for example Jeff’s nomination had stated “I give 40 per cent of my super benefit to my child, Sarah, and I give 60 per cent of my super benefit to my spouse, Lisa, on the condition that she gives $20,000 out of it to my sister, Rita, within 30 days of receiving it” and Rita was not an eligible beneficiary, the condition would be invalid.

If the nomination contains an invalid condition, it raises the following issues: does the invalid condition render the whole BDBN defective, or is the BDBN only defective in respect of the 60 per cent share to Lisa, or only in respect of the $20,000 from Lisa’s share, which was to be given to Rita? If the latter, Lisa would be entitled to her 60 per cent share less $20,000 and the $20,000 originally allocated to Rita would then be distributed at the trustee’s discretion. For certainty, this issue should be addressed in the trust deed, the relevant provisions being inserted either during the initial drafting stages or by a subsequent amendment.

Can the children challenge the nomination on other grounds?

There have been a few recent cases dealing with challenges to BDBNs based on their technical validity, but there is little guidance as to what other grounds may be available to a beneficiary to challenge the nomination.

While they are governed by different laws, looking at cases where a will is challenged may give us some indication as to what arguments could be advanced. It appears there are three main bases to challenge a will: undue influence, lack of mental capacity and testator’s duty of care. How could they be applied to BDBNs?

Undue influence

Undue influence occurs when one party uses their position of trust or confidence over a weaker person to influence them into doing something.

So if for instance Sarah and Helen, who were very close to their father, had exercised a substantial amount of influence over their father to convince him to exclude Stanley and Peter from his nomination, the BDBN may be found invalid on the grounds of undue influence. However, it is generally rather difficult to prove as evidence of influence must be established: undue influence will not be inferred merely because two children have not been included in the nomination.

Lack of capacity

For a BDBN to be valid, it must have been made by a member who had the mental capacity to do so, that is, they were aware of the purpose and effect of making the nomination.

While a condition requiring a beneficiary to change their last name to a testator’s family name (in an attempt to preserve it) was traditionally commonly used in wills, the nature of the name requested by Jeff may open the door to an argument that the BDBN is invalid on the grounds that Jeff lacked mental capacity. A person may be lacking capacity not only because of dementia or Alzheimer’s disease, but also because they are under the influence of legally prescribed or illegal drugs or have an intellectual disability.

If Edward was successful in his claim that Jeff did not have the required mental capacity at the time of making the BDBN, the whole of the BDBN would be invalid and non-binding on the trustee.

NSW Anti-Discrimination Act

The NSW Anti-Discrimination Act 1997 prohibits discrimination against a person on the basis of race, sex, age, homosexuality and disability among other things. As Peter appears to have been excluded from the BDBN because of his homosexuality, could he successfully claim his exclusion from the nomination amounted to discrimination, thereby rendering the nomination invalid?

Unfortunately, the answer is no as the NSW legislation only applies in the areas of employment, education, accommodation, registered clubs or the provision of goods and services. It would be extremely difficult to argue that the making of a BDBN or the provision of death benefits fall under any of these areas.

While religion and religious belief are not grounds for legal discrimination claims under NSW laws (unlike in other states or territories), the court in Hickin v Carrolls & Ors (No 2) confirmed there is no general protection under federal law from being discriminated against on the grounds of religion or belief.

Whether the same outcome would apply under the federal discrimination legislation and the corresponding legislation of the other states and territories is for separate consideration.

Family law provisions

Chapter three of the NSW Succession Act 2006 contains family law provisions allowing certain beneficiaries, such as a spouse or child, to make a claim against a deceased’s estate. Could Stanley and Peter make a claim under these provisions on the basis that, as children of the member, they should have been provided for under the BDBN? Or could Sarah make a claim arguing she has not been adequately provided for in light of her personal circumstances?

Once again, the answer is no as these provisions only apply to claims against a person’s estate or notional estate. If, however, Stanley, Sarah and Peter feel they have been inadequately provided for under Jeff’s will, they could make a claim under the family law provisions asking the court to declare part or all of Jeff’s superannuation interest as a notional estate. If such an order is made, the value of Jeff’s estate to be distributed under the will would be increased by the amount of super benefits being clawed back into the estate.

Moral duty

Does a member have to take a beneficiary’s personal and financial situation into account when preparing their BDBN? For instance, was Sarah entitled to a bigger share than her sister, Helen, because of her financial situation?

There is no case law on that issue for BDBNs, only in relation to wills. It appears that while a testator does not have an obligation to make adequate provisions for their family in their will, the courts do apply the concept of a testator’s ‘moral duty’ to applications made under family law provisions to determine what a wise and just person in the shoes of the testator would have done for their family.

Considering that BDBNs only deal with a person’s superannuation benefits and the fact that there may be tax incentives for not nominating adult children in a BDBN, it is possible the courts’ view may be that imposing a moral duty on a member would prove too onerous on the member and too disadvantageous for the beneficiaries.

Instead, such duty should be limited to the context of wills and probate where a testator has more flexibility in distributing their assets (with the use of testamentary trusts, for example). There is also the argument if a person has been left out of a BDBN, they may still be able to bring a claim under the family law provisions and even have recourse to the notional estate provisions to have the death benefit declared to be a notional estate of the deceased member.

When a member makes a nomination, it is in their capacity as a member, not as trustee or director of the corporate trustee, which means they do not owe any fiduciary duty to potential beneficiaries. And while the sole purpose test requires an SMSF to be run for the purpose of providing retirement benefits for the members or their dependants, this duty is imposed on the trustee, not the member.

The point of the story is that arguably a member can be as outrageous, unfair and unreasonable as they wish when making a BDBN. If a condition is imposed on a beneficiary, it will be valid unless it offends public policy or contravenes the SIS rules. However, the story may be different if a member’s BDBN was found to be invalid and the distribution of the death benefit was left to the trustee’s discretion. The fiduciary duty of a trustee and the multiple covenants they are bound to abide by may result in a different outcome.

 

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