A recent court case involving the allocation of death benefits from a superannuation fund could have significant ramifications for the industry, writes Michael Hallinan.
What is the duty of a legal personal representative in relation to the superannuation benefits of the deceased member? What happens if the individual, who is the legal personal representative of the deceased member, is also a potential beneficiary of the superannuation benefits of the deceased member? Is that individual precluded from claiming the benefits in their own right? Must they claim the benefits only in their capacity as the legal personal representative?
These questions were raised in the recent Queensland court case of McIntosh v McIntosh ([2014] QSC 99). It is likely this case will become one of the standard SMSF cases such as Katz v Grossman and the Conti and Morris Super cases.
The facts
James McIntosh was a member of three public offer superannuation funds. On his death he had an estate of about $80,000. In contrast, his super benefits totalled in excess of $450,000. He died without having made a binding death benefit nomination and without having made a will. At his death he had no dependants. While both his parents were alive at his death, they had divorced many years previously. McIntosh lived with his mother and had little or no contact with his father. The relationship between his parents was difficult.
The terms of the relevant super funds were straightforward: in the absence of any binding death benefit nomination, the trustees were required to pay the death benefits to the eligible beneficiaries of the deceased member. The eligible beneficiaries were the deceased member’s dependants and the legal personal representative of his estate. In respect of McIntosh, there were only two eligible beneficiaries – his mother (as she was a dependant by reason of an interdependency relationship) and his estate. His father was not an eligible beneficiary: a parent is not an eligible beneficiary merely by reason of being the parent.
The mother applied for and was granted administration of this estate. In making the application for administration of the estate, she had expressly acknowledged (in a formal statement to the court) that she was “aware of the intestacy provisions that will apply to the deceased’s estate and the beneficial interest that the deceased’s father has in his estate … I will comply with my duties as personal representative in administering the estate of the deceased member in accordance with the intestacy provisions”.
Subsequent to her appointment as the legal personal representative, she made an application to each of the three funds to be considered as an eligible beneficiary of McIntosh. The trustees of each of the three public offer superannuation funds accepted she was a death benefits dependant of the deceased by reason of the interdependency relationship she had with the deceased. Importantly, she did not in her capacity as the legal personal representative make an application to the three superannuation funds.
The trustees of each of the three public offer superannuation funds decided to allocate the benefits to the mother in her personal capacity. This decision is not unsurprising given the mother in her capacity as legal personal representative did not make an application for the benefits to be paid to the estate. In due course each of the three trustees paid the superannuation death benefit to her.
The father, who was a 50 per cent beneficiary of the deceased estate under the applicable intestacy provisions, claimed she should have made an application for the benefits in her capacity as legal personal representative. Clearly the father could not have made a claim for the benefits as he was not an eligible beneficiary of the superannuation benefits.
The mother considered that as the superannuation benefits were not the property of James and therefore did not form part of his estate, she was not as legal personal representative required to make a claim for the benefits.
As a result of the father querying the mother’s actions in relation to the superannuation death benefits and after considerable correspondence between their respective legal advisers, the mother, in her capacity as legal personal representative, commenced court proceedings for judicial advice. The application was for the court to advise her whether she (in her capacity as legal personal representative) was required to account to the estate of McIntosh for the superannuation benefits paid to her from the three superannuation funds.
Given the outcome in the Morris Super Fund case, the mother was well advised to commence the application for judicial advice.
The court’s decision
The court held that the mother had breached her duties as legal personal representative and that as she acquired the superannuation benefits in breach of those duties, she held the superannuation benefits on a constructive trust for the estate. Consequently, she has to pay the superannuation benefits to the estate and they became an estate asset.
In reaching this decision, the court has to consider a number of issues: namely whether the superannuation benefits were the property of the deceased member, if not, whether the legal personal representative was under a duty to apply for those benefits and whether the mother could apply for the benefits in her own right as a competitor to the estate.
The court agreed the superannuation benefits were not the property of the deceased member. The court held the superannuation benefits would only become part of the estate if and when the relevant trustees exercised their discretion to allocate the benefits to the estate. This finding is plainly correct as the death benefit was structured as a trust where the trustee had to allocate the death benefits to or among the eligible beneficiaries.
The court did not consider and was not required to consider whether the trustees of the three superannuation funds correctly exercised their powers in holding that the mother was in an interdependency relationship with the deceased member. The decision of the court presupposed that there was no error on the part of the trustees.
The court held that even though the estate was a potential beneficiary, the duty of the legal personal representative was to apply for the death benefits. The mother, by not applying for the benefits in her capacity as administrator, had therefore breached her duty and favoured her own self-interest.
Given the breach of duty and the preference of her own interest against the estate, the court held the mother held the superannuation benefits as a constructive trustee for the estate. Consequently the estate would now be valued at about $530,000. As McIntosh died intestate, his parents would be entitled to 50 per cent of the estate on the basis of the relevant intestacy provisions.
Why is this case important?
First, the case illustrates an emerging trend of superannuation benefits being the most significant financial resource after the family home. In this case, the estate was valued at about $80,000, while the super benefits were over five times the value of the estate.
Secondly, the case shows that while a parent is not a dependant of a deceased child by reason of being the parent, the parent may qualify as a dependant by reason of interdependency. In this case, each of the trustees of the three funds accepted that James and his mother were in an interdependency relationship.
Thirdly, the case clearly shows that where a trustee of a superannuation fund has a discretion as to whom to pay the death benefit, the death benefit is not the property of the deceased member. The death benefit will only become an asset of the estate if the trustees of the fund decide to allocate the benefit to the estate.
Fourthly, the case shows that an executor or administrator must apply for the death benefit to be paid to the estate and will have to put forward the best case they can for payment to the estate.
Fifthly, the case shows that when in doubt, it is far better for the executor/administrator to initiate legal action for judicial advice rather than being the defendant in contested proceedings, the principal advantage being the costs of the application would normally be an expense of the estate and the executor/administrator would not be exposed to allegations of failing in their duties.
What is the most important aspect of the case?
The most important aspect of the case is that an individual who is an eligible beneficiary of a superannuation death benefit should not also act as the administrator of the estate. If necessary, another person should be appointed as the legal personal representative. This will avoid any argument that the individual, when lodging a claim for the benefit as administrator, did so half-heartedly or failed to put forward the best possible case.
While the court suggested a member who knowingly appoints as an executor an individual who is an eligible beneficiary of the death benefit in their own right may have consented to the conflict so that the individual is not precluded from pursuing their own interests (by applying for the death benefit as a competitor to the estate), it would be better for the individual to cease to act as executor if they wish to pursue their own interests as an eligible beneficiary of the death benefit.
What should have happened?
The issue in McIntosh’s case only arose because he did not have a binding death benefit nomination for each of his super funds. Had there been valid binding nominations, the trustees would have had to allocate the death benefit in accordance with the nomination.
If McIntosh had made a will that appointed everything to his mother, would the conflict have arisen? In a practical sense, no. However, if the estate was subject to significant debts, the creditors would have an interest in the death benefits being paid to the estate rather than directly to the mother. Equally, anyone seeking to vary the will by making a family provision claim would also have an interest in whether the death benefits were paid to the estate or the mother.
The mother could have decided not to apply for appointment as legal personal representative. This would have given her freedom to apply for the superannuation benefits in her own right and she would have retained her rights as a beneficiary under the intestacy provisions. If this course had been adopted, she would have received $450,000 in superannuation benefits and also would have had a $40,000 interest in the estate: a total of $490,000. However, she in fact received a half interest in the estate worth $265,000.
Finally, the case shows a superannuation death benefit nomination can be a very significant document and can control the destination of far more wealth than a will. If McIntosh had a will, this document would have controlled $80,000 in value. By way of contrast, valid binding nominations (one for each fund) would have controlled $450,000 in value. The need for care and specialist assistance in drafting binding death benefit nominations is obvious.