SMSFs case studies: what should you do and what should you avoid?

In the sixth video of our series examining the five key self managed super fund (SMSF) estate matters you must talk to your client about, Senior Associate Sam Baring takes you through some recent cases that provide a useful starting point for discussion with your clients, and which also make great war stories around what clients should be avoiding in relation to their SMSFs.

The costs associated with litigating matters easily runs into tens of thousands of dollars and, for those that run to trial in the Supreme Courts, hundreds of thousands of dollars. Putting the dollar cost aside, there is also the time and emotional toll, which must be considered and has a significant impact on clients. Unfortunately there have been plenty of cases in this space demonstrating the consequences of not having a clear and technically compliant Binding Death Benefit Nomination (BDBN).

This year’s decision in Re Marsella shows how an arbitrary decision to pay death benefits to a particular beneficiary without a thorough and genuine consideration of the competing claims of other potential beneficiaries may be set aside by the Court. It also shows a greater willingness on the part of the Court to intervene than has been shown in the past.

In Re Marsella, Helen Marsella was survived by her husband and by her two children from her first marriage, Caroline and Charles. Helen and Caroline had established an SMSF as trustees, with Helen as the sole member. When Helen died, Caroline became the sole trustee of the SMSF. After Helen’s death, Caroline resolved, as surviving trustee, to pay the entire death benefit to herself, and also purported to appoint her husband as a trustee.

The court intervened on the basis that Caroline had failed to inform herself of the relevant matters and thus had failed to actively and genuinely exercise her discretion.

Munro v Munro shows how precise adherence to technical requirements for a BDBN is necessary.

Mr Munro left a Will naming his daughters as his executors and a document, prepared by his accountants, purporting to be a BDBN and nominating the ‘Trustee of Decease Estate’ to receive the benefits.

The problem was that, for SIS legislation purposes and for the purposes of the trust deed, a binding nomination could specify only dependants or the member’s legal personal representative. An LPR for SIS purposes means, in relation to a deceased person, the executor of their Will (or the administrator of their deceased estate).

Because the document did not nominate either a dependant of Mr Munro or his LPR, it did not comply with either the terms of the trust deed or the SIS legislation. It was therefore not a binding nomination for the purposes of the trust deed.

The case of Wooster v Morris highlights the importance of control in the SMSF context. Despite a valid BDBN, the person in control can challenge the nomination and engage the SMSF and other beneficiaries in litigation.

Mr Morris purported to execute a BDBN in favour of his daughters. After his death and the grant of probate, Mrs Morris received advice to the effect that the BDBN was ineffective. She resolved to pay all of the DBs to herself.

The Court found in favour of the daughters and ordered that that the corporate trustee and Mrs Morris, jointly and severally, should pay the entitlements and costs of the plaintiff daughters. This was on the basis that Mrs Morris made two decisions which showed she failed to act impartially: the first being her decision that the BDBN was not binding on the fund, and the second, the decision to defend proceedings bought by the plaintiffs.

The Court held that Mr Morris should have sought advice from the Court.

In McIntosh v McIntosh [2014] QSC 99, the deceased, James, died intestate and with no surviving spouse or children. He had superannuation entitlements of approximately $450,000. Mrs McIntosh, James’ mother, applied to his superannuation funds to have the benefits paid to her personally, on the grounds that she was a superannuation law dependant by reason of interdependency.

There was a clear conflict of duty and interest contrary to Mrs McIntosh’s fiduciary duties as administrator. Mrs McIntosh was required to account for the benefits she received from the superannuation funds in breach of her duties, by transferring those amounts to the estate of her son James.

The position in this case might have been different if James had left binding nominations in favour of his mother or had appointed his mother as his executor under his Will, having previously nominated her as his beneficiary to receive his superannuation benefits. This is because there is an exception to the rules regarding conflicts where a testator, with knowledge of the facts, has imposed on a trustee a duty which is inconsistent with a pre-existing interest or duty which the trustee has in another capacity.

Ioppolo & Hesford v Conti spotlights that superannuation directions in a Will can be ignored.

Mrs Conti’s Will stated that her superannuation entitlements should be applied to her children, and she stated specifically that she did not want any entitlement paid to her husband Mr Conti. After seeking legal advice, Mr Conti resolved to pay the whole of the benefit to himself.

There was no evidence that Mr Conti had not acted bona fide, particularly given that he had sought and followed legal advice. He was entitled to ignore the direction in the will, and the mere fact that he did so could not in and of itself be evidence of a lack of bona fides.

These are just a few of the many cases in recent years that have emphasised the importance of having a valid BDBN in place that complies with SIS legislation and the SMSF Deed. If you’re in any doubt as to whether your client has an appropriate structure in place, we strongly encourage you to contact us to discuss this further.

Emma Woolley
Partner & Head of Family Office Advisory

Emma has extensive experience advising clients in estate planning/administration, succession, trust structures and disputes.

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William specialises in helping clients work through their personal and business succession planning and achieve their goals.

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James specialises in estate and succession planning for high-net-worth clients in Australia, the UK, Europe, the US and Asia.

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Sam is a private clients lawyer whose practice focuses on estate and succession planning, with extensive experience in smsfs.

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