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.

SMSFs - the less change the better

Cartoon by Nicholson from "The Australian" newspaper: www.nicholsoncartoons.com.au

Rumours  abounded prior to the recent Mid-Year Economic and Fiscal Outlook (MYEFO) that Treasurer Swan was looking to fill a hole in the Budget by attacking the superannuation industry one way or another. Changes to capital gains tax had been mentioned by various commentators.  We saw the significant labour union and industry super figure in Bill Kelty come out and make a strongly worded statement via the weekend papers that the government should "be very careful" when tinkering with the superannuation system.  As it's turned out the only measure to hit  self-managed funds is the increase in the SMSF levy from $191 to $259, which equates to around $32 million a year in extra revenue.

An additional pleasing measure for self managed fund trustees and their advisers to know about is the government's move to amend the law as it relates to the tax exempt status of fund income earned on investments used to support pensions.

The government decision overturns a draft ruling made by the Tax Office last year and will allow the pension earnings tax exemption to continue after the death of a pensioner until the deceased member's benefit has been paid out of the fund.

Andrea Slattery, CEO of the SMSF Professionals Association of Australia said on 22 October 2012:

This is excellent news for the thousands of SMSFs in the pension phase which could otherwise have faced significant capital gains tax bills on the payment of death benefits.

The new law will apply for the 2012-13 tax year.