When death duties and gift duties applied some fifty years ago, an estate plan usually only involved considering the succession of a client's personal assets following his or her death. Whilst death and gift duties were considered an unfair tax on a person's wealth, they were difficult to avoid and were considered just another cost to the estate.
Now due to capital gains tax, a much greater incidence of blended families, a broader definition of dependancy and the (sometimes) huge legal costs resulting from challenged wills there is a heightened focus on tax minimisation and asset protection involving structures to protect these assets. Coupled with the advent and rapid growth of superannuation as an investment, estate planning these days requires much more thought and consideration.
It is estimated that there are now more than 500,000 self managed superannuation funds established in Australia that control more than $500 billion in assets. As superannuation is now quite commonly a will-maker's most valuable asset, consideration as to how it should be dealt with on death is an intrinsic part of estate planning.
Member death benefits
On death, payments made from a member's superannuation fund are known as "member death benefits". These include the amount standing to the credit in a superannuation member account as well as the proceeds of any life insurance policy taken out as part of their membership in the fund. Payment of member death benefits from a superannuation fund are determined in accordance with the relevant legislation and the governing rules of the superannuation fund trust deed, not in accordance with the will of the member.
Trustees of the fund
When setting up a self managed superannuation fund (SMSF) individuals or a company can be designated as trustees. In order for a fund to qualify as a SMSF, the fund must have fewer than five members and its trustees must be:
- all the members of the fund, in the case of individuals;
- directors of the corporate trustee in the case of companies;
- for a single member fund, that person is:
- sole personal trustee or
- sole director of a corporate trustee or
- is trustee or director with one other person who is a "relative" of the member.
In the case of corporate trustees, there is no restriction on who should be the shareholders of the corporation. Shareholders have the right to appoint replacement directors and so, following the death of a member, may have effective control over the allocation of a member's death benefit.
The trustee generally has the discretion as to which of the deceased's "dependants" or the deceased's legal personal representative will be paid the member benefit and in which proportions. "Dependants" are defined as a spouse of the deceased, a child of the deceased, anyone who is financially dependant upon the deceased and anyone with whom the deceased was in a relationship of interdependancy.
The effect of poor planning
Trustees are required to act in accordance with the governing legislation and the terms of the trust deed. If care is not taken to select a suitable person as successor in the role of trustee (or in the case of a company, consideration given to who will control the company on the death of the member) situations can arise where a successor trustee can have the power to distribute the entire member benefit to themselves to the exclusion of other family members who may have been intended recipients.
A recent case where this occurred is Ioppolo & Hesford (2013) WASC 389. Mrs Conti, a member of an SMSF died leaving her estranged husband the sole trustee of the SMSF. Mrs Conti had expressed a wish that her children be the recipients of her member benefits on her death in her will. Her estranged husband proceeded to appoint a corporate trustee as trustee of the fund and as sole director of the corporate trustee made a resolution transferring all of the member benefits to himself. The court upheld his right to do this regardless of the direction in Mrs Conti's will.
The case highlights the importance of considering succession of the role of the trustee of a SMSF and the subsequent control they will hold. The issues could have been prevented through a careful analysis of Mrs Cortis' affairs, including possible amendment to the governing trust deed. In circumstances where a corporate trustee had been appointed, the terms of the company constitution should have been considered and appropriate amendments made to it.
Binding death benefit nominations
The question of succession of the role of trustee loses much of its significance and greater certainty is assured if a binding death benefit nomination (BDBN) is put in place by a member. Subject to any limitations in the governing deed, a person can usually sign a BDBN directing a trustee to pay their member death benefits directly to certain dependants or to their estate for distribution in accordance with the terms of their will. Provided the nomination complies with the formal requirements set out in the deed and the necessary procedure followed, the trustee will be bound to pay the benefit in the nominated manner.
The implementation of BDBNs is not recommended for all clients. They are useful to provide certainty as to how a benefit will be paid and can operate to ensure that benefits do not come into a deceased's personal estate. This is an effective estate planning strategy that can be put in place to avoid a family provision claim being made by a disgruntled family member with respect to the SMSF assets.
However, BDBNs can fail if they are not properly drafted, the necessary procedure is not followed or if a member's circumstances change but they fail to revoke their BDBN before they die.
Depending on the terms of the governing deed a BDBN may lapse after a period of 3 years. More modern deeds provide for non-lapsing nominations.
Consideration should be given as to whether a member should have an enduring power of attorney in place authorising their attorney to renew (but not amend or revoke) an existing lapsing BDBN should they lose the mental capacity to do so themselves.
Whether or not BDBNs should be put in place as part of an estate plan depends on a person's family, other circumstances and their succession goals.
Consideration needs to be given to whether or not the certainty and advantages outweigh the flexibility of giving the successor trustee the discretion to pay the deceased's member benefits in his or its absolute discretion amongst the deceased's dependants, based on the deceased's circumstances at the time of death.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.