SMSF trustees not bound by their deed as to who will be the recipient of a death benefit should carry out a claim-staking exercise, even if it does not alter their decision, to prevent challenges to the payment by other potential beneficiaries, according to an SMSF legal expert.
DBA Lawyers senior associate William Fettes pointed out trustees had little freedom as to who receives a death benefit payment if the SMSF deed spelt out the options under superannuation law, however, they could act with more discretion if there were no binding directions.
“In this case, the Superannuation Industry (Supervision) Act doesn’t determine who will be the recipient and so it’s a matter of trust law and the governing rules of the fund as to how that is done,” Fettes said in a recent webinar presented by his firm.
“It has to be a proper process where the discretion is carried out in a way that is appropriate for a trustee of a super fund.
“Claim staking is the terminology we use where we’re talking about considering the eligible beneficiaries, understanding their circumstances and exercising discretion at the right time after taking into account all the relevant considerations and not taking into account any non-relevant considerations.
“This is an important exercise, even if it’s not mandated and enshrined in the trust deed, because it protects the trustee from an aggrieved beneficiary coming along and saying: ‘I don’t think you acted in good faith and considered all eligible beneficiaries.’”
He noted Australian trust law made it difficult to challenge a trustee’s exercise of discretion, but it could be reviewed where they failed to act in good faith, with genuine consideration, or provided reasons that were unsound.
“If you don’t follow this kind of proper process, it’s a potential opening for an aggrieved beneficiary to come along and bring a challenge,” he said.
“It doesn’t mean they will win, but it could be you are opening yourself to a challenge that is not entirely satisfactory to the agreed beneficiary, such as overturning the decision and giving it back to the trustee to make the decision again.
“There are other outcomes and sometimes the court will say you’ve got requirements to report back and do things with restrictions, and in extreme cases might remove the trustee, which has happened on occasion.”
