Disputed death benefits in superannuation, and in particular in SMSFs, unsurprisingly continue to arise.
Why should this situation be predictable? For the same reason deceased estates are challenged by surviving relatives who disagree with the deceased’s wishes or disapprove of the executor’s behaviour.
A recent case comes to us from the South Australian Supreme Court and involves a binding death benefit nomination (BDBN). The case is known as Cantor Management Services Pty Ltd & Ors v Booth.
At a personal level, this case is quite exciting because it favourably refers to my book, The Essential SMSF Guide, published by Thomson Reuters.
The case looks at a death benefit paid from a single-member SMSF with a corporate trustee. The deceased’s brother was director and sole shareholder of the SMSF’s corporate trustee because of an enduring power of attorney that had been executed before the member died. This had been put in place because the deceased was regularly overseas. A cousin of the deceased, Susan Booth, and not the surviving brother, had been appointed as the deceased’s executor.
The SMSF’s main asset was an industrial shed in Coolum, Queensland, which was leased to a business controlled by the deceased’s brother for less than normal market rates. This conflict and potential breach of the arm’s-length super laws do not appear to have been addressed in this court case.
The deceased executed a BDBN so that his super benefits would be paid to his legal personal representative. Once the proceeds were received by his estate, he wanted the money placed into a type of testamentary trust with distributions paid to his wife.
The brother claimed that, as the SMSF’s trustee, he had not validly received this nomination and that, in any event, he was his dead brother’s legal personal representative because of the power of attorney.
The court found the nomination had validly been executed in accordance with the fund’s trust deed and had been given to the trustee (because it had been delivered to the trustee’s registered address, which was also the fund administrator and tax agent’s place of business) and the brother was not the deceased’s legal personal representative after death because his enduring attorney role ceased upon his brother’s death. As a result, the dead brother’s executor became director of the corporate trustee.
It is not unusual for some SMSF service providers to yawn when these cases are raised. Perhaps they think these situations won’t occur among their client base. Hopefully their hunch is right.
On the face of it this is somewhat understandable. While the number of complaints involving super benefits is growing, they are, in the scheme of things, still small in number.
But legal action is only one way to unexpectedly increase the workload of SMSF administrators, tax agents and auditors.
It is remarkably common for SMSFs to be used as a weapon by aggrieved parties. For example, allegations are often made between separating couples of one party acting in bad faith or illegally or unfairly or undertaking some other nefarious action.
As an extension of this, some aggrieved parties aim their attacks against other individuals to impact on their former partner.
Sometimes couples may attack each other indirectly by formally complaining to professional associations that an SMSF’s service provider belongs to or government organisations they are registered with. For example, they may allege the service provider did not administer the fund properly or did not treat equally all fund beneficiaries or did not invest the fund’s money in the best interests of all members.
Another variation of using SMSFs as a weapon by alleging poor behaviour may arise because of complaints made by business partners who have fallen out and are now separating their working lives.
In all these cases, service providers have to spend considerable time justifying their behaviour and seeking to avoid being sanctioned by regulators or professional associations.
When reviewing these situations, it is often essential to review the fund’s trust deed and minutes of trustees’ decisions. This is done to confirm that the right actions have taken place and that the fund has been administered correctly, and that trustee decisions and actions have been correctly documented.
Tony Negline is head of superannuation at Chartered Accountants Australia and New Zealand.