Reversionary pensions carry risks

Reversionary pensions BDBN

There are risks in establishing reversionary pensions for clients that could undermine BDBN-based estate planning strategies.

A leading SMSF lawyer has warned advisers to be aware of the risk they are taking on when establishing reversionary pensions for their clients that overrides any previously existing binding death benefit nominations (BDBN).

“If a pension gives priority [over a BDBN], you could be actually giving unqualified legal advice. You could be at greater risk because if you drop in that pension [and it is] inconsistent with what’s been dropped in as estate planning or you haven’t gone through the estate planning discussion, you’re at risk,” DBA Lawyers director Daniel Butler told delegates at Class Connect 2019 in Sydney yesterday.

“On that, whether you have PI (professional indemnity) insurance that’s going to be at risk as well, that’s another flow-on consequence.”

Butler cautioned advisers to always be mindful that upon the death of a member there was often disgruntled beneficiaries who may want to mount a legal challenge with regard to the situation.

“You’ve always got to think about [how] there’s always the opportunity or the risk of a vexatious litigant,” he said.

Further, he recommended advisers carefully scrutinise the element of the SMSF trust deed they have in place for the client if it purports to resolve conflicts that arise upon the death of a member and the associated payments to the beneficiaries of the fund.

“This stuff is somewhat technical and frankly do you really want to be out there putting yourself at constant risk of major litigation where [it could cost millions of dollars]?” he said.

“Do you really get paid for wearing that risk in your shoes? Is it really something you want to be involved with and do you want your staff involved?”

Butler noted that he was not trying to dissuade advisers from the documentation they were currently using, with particular regard to death benefits, but was merely suggesting they should be aware of the associated risks.

Earlier this year, Butler warned that advisers who put in place reversionary pensions incorrectly could be engaging in inappropriate legal work.

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