Who has control of your super fund balance when you die? Wooster v Morris

www.talentbank.com

It's likely you already know that super lies outside your will.  You probably have thought about and may have executed a Death Benefit Nomination and think that you've covered this issue.  You may need to think again.  A recent Supreme Court of Victoria decision highlights some important issues for those wishing to ensure their super account balances are passed to the right beneficiary or beneficiaries in a timely manner.

In November 2013, in the case of Wooster v Morris, Justice McMillan upheld the validity of a binding death benefit nomination which had been determined by the self managed super fund's trustee to be invalid.  What was the problem?

Let's set the scene.  Maxwell Morris had two daughters, Susan and Kerry, with his first wife.  In March 2008 Maxwell Morris made a binding death benefit nomination in favour of Susan and Kerry, prior to his death in February 2010.  At the time of his death, Maxwell Morris and his second wife, Patricia, were both members and individual trustees of the super fund.  After Maxwell died, Patricia appointed her son (from a previous marriage) Nathan Ashman as co-trustee and then together they sought advice from DLA Piper solicitors about the validity of the binding death benefit nomination.  Patricia and Nathan subsequently resolved to replace the trustees with a corporate trustee, Upper Swan Nominees Pty Ltd.  Patricia was the sole director and shareholder of Upper Swan.  There were also accounting errors made by Patricia's accountant for the years 2009 and 2010 because the accountant had not accurately recorded Maxwell's entitlements under the accounts in his name for those years.

DLA Piper solicitors gave Patricia,  Nathan and Upper Swan legal advice that the  binding death benefit nomination was invalid and not binding on Upper Swan as trustee. This advice was based on their instructions that the binding death benefit nomination had been prepared by Maxwell but not delivered to Patricia, as required by the terms of the super fund trust deed.  Upper Swan then resolved to accept the legal advice and determined that the Binding Death Benefit Nomination was not binding on it as trustee.  All the funds in Maxwell's super fund accounts were then applied to Patricia's super fund accounts held solely in her name.

Susan and Kerry issued proceedings in the Supreme Court seeking to enforce the Binding Death Benefit nomination.  There was over $900,000 from Maxwell Morris' accounts in the super fund at stake.  The Court upheld their claims in full and ordered costs and interest against Patricia and Upper Swan.  However, Susan and Kerry had to wait over three years and incur the stress and financial strain of bringing a court action to recover what was rightfully theirs.

What could Maxwell Morris have done differently?  

The best thing he could have done was establish the super fund with a corporate trustee - perpetual succession of the corporate entity deals with the issue of survivorship of individual trustees, or loss of legal capacity which is often an issue with ageing trustees. Maxwell Morris could have bequeathed his shareholding in the trustee company to his chosen beneficiary, thus preserving his control over the entity.  In this case, Patricia Morris alone held the purse strings after Maxwell's death and there wasn't anything that Susan and Kerry could do about it after Maxwell had died, even though they were fully entitled to all his benefits in the fund.  

If your fund doesn't have a corporate trustee, you can still adequately deal with the issue of trustee succession by specific provision in the trust deed for appointment of a replacement trustee on death or incapacity.  It's relevant to know the procedures such as obtaining consent of the replacement trustee ahead of time and whether the decision of the remaining trustee or trustees is determined by the majority account balance holder or another provision in order to avoid deadlock or unsatisfactory decision making.  Needless to say, you still need to have a current Will nominating the right legal personal representative for you, and you should always have a current Enduring Power of Attorney in place to deal with your personal assets.  

Sage Advisers generally recommends the preferable structure for SMSFs is to have a corporate trustee and encourages clients regularly to review the death benefit nominations of all SMSF fund members.  We work together with clients' solicitors to structure things correctly at the outset, and review them along the way.

Tax breaks in the "Age of Personal Responsibility"

Treasurer Hockey has called an end to the "Age of Entitlement", see here. Describing the SPC decision as a signal to the rest of the country that past practice no longer applied, Hockey said it was up to businesses to take all necessary steps to get their own houses in order before the last resort of seeking a government bail-out.

''The age of entitlement is over. The age of personal responsibility has begun.''

'I say to you, emphatically, everyone in Australia must do the heavy lifting now'.

No-one's quite sure how this will all pan out. SPC is the current target politically, however there are big dollars up for grabs if policy changes are made to the tax treatment of superannuation and other concessions such as the 50% discount on capital gains tax and the CGT exemption of the family home.

Chris Richardson, economist with Deloitte Access Economics has estimated together these tax breaks amount to $66 billion in the coming year. The Abbott government has indicated that there will be a review of taxation in a white paper later in 2014.

Richardson states he considers the superannuation concessions to be necessary but not equitable and need to be revisited, in accordance with the recommendations of the 2012 Henry Review.  We have previously covered the range of changes proposed during 2013 to superannuation earlier in this blog. The main argument made by proponents for change in this area is one of equity. The poor pay more in a flat tax treatment and the rich benefit more.  The contrary argument is that when the rich make more money, this benefits everyone by their paying more tax overall; effectively growing the pie as well as encouraging people to save.

The combination of the capital gains discount, the ability to negatively gear rental properties, state stamp duties and land taxes also came under scrutiny in the Henry review. The then Rudd government ruled out any tinkering with negative gearing or the 50 per cent capital gains tax discount. But the review had recommended a broad-based land tax to replace “inefficient” property taxes.

Both the Institute of Chartered Accountants in Australia (ICAA) and CPA have made recommendations recently in these areas, such as restricting lump sum withdrawals from superannuation and encouraging income streams as a viable alternative.  Both associations have indicated the desirability of a systemic approach rather than piecemeal reform.

We consider the government should:

• apply GST to all spending except wages;
• broaden the land tax base;
• abolish stamp duty and payroll tax;
• increase the progressive personal income tax thresholds;
• raise pensions and income support for those who need them; and
• leave superannuation alone.  It has been modified and tinkered with too many times and another change would further erode confidence in the system.

These policies are unlikely to be implemented across the board. However, they would achieve, and reach sooner, the outcome of a balanced budget instead of passing on ever increasing deficits to the next generation.  And this would be the real "Age of Personal Responsibility".