For many Australians, their superannuation is a substantial part of their net worth. It is therefore important to understand what happens to your superannuation on death and how you can ensure that superannuation passes to the persons you intend.
Who can be a member and trustee of a self-managed superannuation fund (SMSF)
A SMSF must have fewer than five members, and its trustees must be:
- all the individual members of the fund or directors of a corporate trustee of the fund; or
- for a single member fund, that person is sole director of a corporate trustee, or is trustee or director with one other person who is a "relative" of the member (noting that a “relative” includes a parent, child (including adopted, ex-nuptial etc), grandparent, grandchild, sibling, niece and nephew).
What are the effects of the death of a member on a SMSF trustee?
(i) One member, two individual trustees
Subject to the terms of the trust deed, the remaining trustee (who is a “relative” of the member) will generally have effective control over the disposal of the member’s death benefit.
In the event of the demise of both trustees, the SMSF’s trust deed should provide a contingency mechanism here. If not, the Superannuation Industry (Supervision) Act 1993 (SISA) provides that the legal personal representative of the member may step into the role of trustee for the period from the date of death until the member’s death benefit commences to be payable
(ii) One member, sole director of trustee company
The surviving shareholders will generally have the power to appoint a new director/s and will have the ultimate control of the SMSF. Where the member was the only shareholder of the corporate trustee, the shares will form part of the member’s estate and the member’s legal personal representative (that is, their executor) can generally appoint themselves as director of the corporate trustee.
(iii) One member, two directors of corporate trustee
The surviving director of the corporate trustee will remain director of the corporate trustee and as such, will have effective control of the SMSF (including over the disposal of the member’s death benefit). Such control may be lost if the shareholders appoint new director/s.
What happens to superannuation on death of a member?
When a member of a superannuation fund (whether SMSF or an industry fund) dies, there will be some form of death benefit payable. Typically, such death benefit will fall outside of your estate unless a binding death benefit nomination (BDBN) has been completed directing the death benefit to your estate. Where there is no BDBN, the trustee of the SMSF or industry superannuation fund has complete discretion as to who receives the death benefit between your dependents and legal personal representatives and in what proportion.
Who are dependents of the deceased?
Dependents are defined under SISA to include a spouse, de facto spouse, child, step-child, adopted child, child born via surrogacy or IVF procedure, and any child (under this wide definition) of any spouse. It also includes any person in an interdependency relationship with the member, which is defined under SISA as being persons in a close personal relationship which also entails living together, financial support and domestic support and care
What is the importance of a BDBN?
A BDBN can provide certainty as to how a member’s death benefit will be distributed. As referred to above, where a member does not have a BDBN, the trustee has complete discretion as to who is to receive the death benefit and in what proportion. This may result in the benefit being distributed against the member’s intentions. A BDBN can be useful for the following reasons.
- the trustee is bound to follow the directions given by a BDBN;
- the death benefit does not form part of your estate (unless directed to your legal personal representative) and as such, can avoid possible family provision applications;
- as it does not form part of your estate (again, unless specifically directed to your legal personal representative), it avoids delays associated with estate administration; and
- Payment of the death benefit may be more tax effective.
To rely on the comfort given by having a BDBN in place, you must ensure that it remains current and does not lapse.
What needs to be considered when making a BDBN?
For a BDBN to be valid, it must comply with the trust deed and requirements described in regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994. The BDBN:
- must be in writing;
- must be signed and dated by the member in the presence of two witnesses who are over the age of 18 and are not nominated to receive a benefit in the BDBN;
- must contain a declaration signed and dated by the witnesses stating that the BDBN was signed by the member in their presence; and
- will lapse after three years (although a SMSF can provide for non-lapsing BDBNs).
As most SMSF trust deeds allow both non-binding and binding nominations, you should ensure that any nomination explicitly references that the nomination is binding (as otherwise, a Court could determine that the nomination is non-binding which could have disastrous consequences).
Case scenarios
(i) Death of a trustee
The case of Katz v Grossman involved a two-member (mother and father) SMSF with individual trustees.
Upon the death of the mother, the father appointed the daughter as his co-trustee. When the father died, the daughter appointed her husband as her co-trustee.
The daughter and her husband were then able to use their discretion to distribute the father’s death benefit solely to the daughter, despite the father having a non-binding death benefit nomination to pay the death benefit equally between the daughter and her brother.
The brother contested such distribution, arguing the technicalities of the appointment of the daughter’s husband as co-trustee but those arguments ultimately failed.
You will see here that despite the father’s intentions, control of the SMSF was seized by the daughter using the valid appointment of her husband as her co-trustee. This enabled them to make such distribution to the daughter without following the non-binding death benefit nomination as such nomination, as its name suggests, is not binding on the trustees to follow.
This could have been avoided by the father completing a BDBN.
(ii) A defective BDBN
The case of Donovan v Donovan involved a sole member SMSF with a corporate trustee.
The member completed a nomination directing the death benefit to his legal personal representative. The nomination did not make reference to it being ‘binding’.
As the SMSF trust deed allowed both non-binding and binding death benefit nominations, the Court determined that the nomination was non-binding and the death benefit was directed to the member’s second wife, disentitling the member’s daughter from a prior marriage.
The outcome would have been different if the member stipulated that the nomination was to be treated as binding.
(iii) Control issues on the death of a member
The case of Wooster v Morris involved a SMSF where a husband and wife were the members and individual trustees.
On the passing of the husband, the wife became the sole trustee so appointed her son (the stepson of the husband) as her co-trustee. The trusteeship of the SMSF was subsequently changed to a corporate trustee where the wife was the sole director and shareholder.
Despite the husband having completed a BDBN in favour of his daughters from a prior marriage, the trustee considered the BDBN not binding and determined to distribute the husband’s death benefit to the wife.
The Court determined that the BDBN was valid and ordered that the corporate trustee and the wife pay the entitlements to the daughters.
This case highlights the importance of control of a SMSF as despite the deceased member having a valid BDBN, the trustee can challenge such nomination and expend considerable cost in litigating.
As the above cases demonstrate, dealing with the death of a member of a SMSF is quite complicated and requires careful and considerate planning.
You should therefore ensure you obtain appropriate legal and financial advice concerning the succession of your SMSF so as to avoid any disastrous consequences.
