A strategy specialist has warned the practice of putting in place a certain type of binding death benefit nomination (BDBN) to direct SMSF benefits into an estate could face legal challenge in the near future.
LightYear Docs founder Grant Abbott said the danger of litigation was specifically applicable to these situations where a BDBN directed death benefits to a deceased SMSF member’s estate which was subject to other forms of legal action.
“This is going to be an interesting one to see how it is tested. At some point in time there needs to be, I think, a negligence action against the legal fraternity for automatically transferring superannuation monies via BDBN or an SMSF will into the estate if there is the potential [for a] family provisions claim,” Abbott noted.
He pointed out the issue arises because unlike other assets upon the death of an individual, superannuation does not have to be included in the deceased person’s estate, which leaves these death benefits open to otherwise avoidable challenges.
“So it is optional [as to whether superannuation forms part of the estate, so] in this instance failing to warn the client that it may be subject to a family provisions claim. It’s certainly a right of litigation of any person who was entitled [to a distribution from the estate],” he said.
According to Abbott, practitioners who put in place a BDBN that channels superannuation death benefits opens them up to legal action under certain sections of the Superannuation Industry (Supervision) (SIS) Act 1993.
Specifically, the action could bring into play section 54C(1) of the SIS Act, which stipulates “a person must not contravene any other covenant contained, or taken to be contained, in the governing rules of a superannuation entity”, he noted.
In turn this could allow clients to make use of section 55(3) of the SIS Act, which states “a person who suffers loss or damage as a result of conduct of another person that was engaged in in contravention of subsection 54B(1), 54B(2) or 54C(1) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention”, he said.