Australia: Notional estate regime claws grip onto superannuation

If your Will is challenged and there are insufficient assets in your estate to satisfy the provision order, the court may call on your superannuation death benefits as notional estate in order to satisfy the claim.

Superannuation death benefits

A superannuation death benefit comprises of money held in a superannuation account plus any life insurance payable to the superannuation account.

When a member of a superannuation fund dies, the trustee of the fund must pay a death benefit in accordance with the fund's rules. The Superannuation Industry (Supervision) Regulations 1994 (CTH) (SIS Regulations) restrict the persons to whom a fund can pay all or part of a death benefit. Regulation 6.22 requires that a fund can pay all or part of a death benefit to either or both of:

  1. the member's legal personal representative (LPR) – the person handling the estate of the deceased member;
  2. one or more of the member's dependants.

A summary on death benefit dependants can be found in this article.

Notional estate regime

Chapter 3 of the Succession Act 2006 (NSW) (Succession Act) provides that the court may make an order (a notional estate order) if the court considers that adequate provision for the proper maintenance, education or advancement in life of an eligible person has not been made by a testator's Will or by operation of intestacy and the court thinks a notional estate order ought to be made. Notional estate orders ensure that the family provision principles are not frustrated by the testator's financial manoeuvring.

Property may be designated as notional estate if the testator entered into a "relevant property transaction" on or before the testator's death. A testator has entered into a relevant property transaction if the testator did, directly or indirectly, or omitted to do any act which results in property being held by another person or subject to a trust and the testator did not receive full valuable consideration.

Section 80(2) of the Succession Act prescribes four circumstances when property may be designated as notional estate:

  1. if the relevant property transaction takes effect on the testator's death. This includes property held in joint tenancy which vests in the joint tenant's sole name by survivorship, life insurance and superannuation.
  2. if the relevant property transaction takes effect within 1 year before the testator's death and was entered into when the testator had a moral obligation to make adequate provision, by will or otherwise, for the proper maintenance, education or advancement in life of an eligible person which was substantially greater than the testator's moral obligation to enter into the transaction. "Moral obligation" means the testator's obligation to make a wise and just assessment of the interests of any person who is able to ask to be taken into account when the testator is determining what adequate provision for proper maintenance, education and advancement in life, should have been made for him or her. This type of notional estate would include generous cash gifts or transfers of real estate made shortly before the testator died.
  3. if the relevant property transaction takes effect within 3 years before the date of the testator's death and was entered into with the intention, wholly or partly, of denying or limiting provision being made out of the testator's estate for the maintenance, education or advancement in life of any person who is entitled to apply for a family provision order. This covers deliberate structuring to defeat family provision claims.
  4. if the testator's estate has been distributed.

Notional estate regime & Superannuation

Whilst superannuation death benefits may not form part of the estate, the court may designate it as "notional estate" if a family provision order is made and the actual estate cannot cover the provision.

Given the scope of relevant property transactions, the act or omission of making a binding death benefit nomination (or changing a binding death benefit nomination) would be sufficient to be a relevant property transaction with the result that the death benefit would be within the scope of a notional estate order. Further, a resolution of a superannuation fund trustee to make payment of a death benefit to a dependant can also be deemed to be a relevant property transaction.

Real life application: Kelly v Deluchi [2012] NSWSC 841

In Kelly v Deluchi [2012] NSWSC 841, the children of the deceased applied for a family provision order and sought an order to designate all or part of the property held by the Trustee as notional estate.

The deceased's Will made the following gifts:

  • legacies to his three children and a friend;
  • any proceeds of a life insurance policy to his grandchildren; and
  • the residue of his estate to his wife (who was not the mother of his children).

There was little in the estate to pay the legacies in full. However, the deceased was a member of a self-managed superannuation fund at the date of his death.

In February 2012, being a time after the deceased's death, his wife in her capacity as sole director of the trustee of the SMSF presided at an Extraordinary General Meeting of the trustee at which it was resolved to allocate the deceased's death benefit to her.

It was held by Hallen J that the resolution of the trustee was a relevant property transaction. His Honour made orders to designate part of the superannuation fund assets as notional estate to enable payment of legacies to the two children. The sums of the legacies were increased as result of the family provision order.

Understanding the bigger picture

It is important to understand, based on your own circumstances, who is eligible to make a claim against your estate under the Succession Act and what provision you should make to those persons in your Will. If you fail to make sufficient provision, your Will may be challenged. If the size of your estate is insufficient to satisfy the claim, however you have a large superannuation death benefit, your superannuation death benefit may be clawed into your estate under the notional estate regime.

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.

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Authors
Michael Crowe (formerly with Carroll & O'Dea)
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