SMSF advisers need to be mindful that notional estate orders decided by the courts in regard to will challenges can affect superannuation balances, according to an SMSF lawyer.
“With notional estate orders someone goes to the court and says ‘somebody has died, they didn’t leave me enough, and I want my share’,” Townsends Corporate and Business Lawyers associate Caroline Harley said.
“The court then takes a look around and then decides whether or not it wants to listen, is the complainant an eligible person, and if they are, the court then decides: ‘Am I going to give this person some money?’
“If there is enough money, that’s fine, the court can give that order, but if there is not enough, that’s when notional estate comes in. And the court can decide ‘we might just drag the superannuation benefits back into the pot so we can pay this person who’s eligible’.”
Notional estate orders only operate under New South Wales legislation and only apply to claims against wills from 1 March 2009 onwards. However, they can apply to what the court considers a relevant property transaction, regardless of the state in which it occurs.
People who are eligible for this type of order include a spouse, de facto, or former spouse, a child, and a person who was living in a close personal relationship with the deceased at the time of their death.
In regard to SMSFs, Harley said notional estate orders had implications for elements such as binding death benefit nominations (BDBN), but pointed out strategies to guard against them did exist.
“The best course of action would be to leave a non-lapsing death benefit nomination in place for a SIS (Superannuation Industry (Supervision) Act) dependant. This is the best course of action in my view because it will show the intentions of the testator, which is something the court can consider before it brings something in to make a notional estate order,” she said.
“Unfortunately, the making of a BDBN is very, very likely to be considered a relevant property transaction, so it’s still going to be at risk.”
The situation surrounding reversionary pensions was a little less clear, she said.
“It’s a little bit unclear as to whether the act of the reversion of the pension at the time of death would be considered a relevant property transaction because we’ve only got case law from 1992, which is under the old legislation,” she said.
“Although it is indicative the court is willing to say a commutation will be a relevant property transaction.
“So where the pension reverts to the reversionary pensioner and they stop, they pull out a big lump sum, it’s indicative that it’s likely to be a relevant property transaction.”
