Thinking | 5 July 2022

SMSFs in estate planning: takeaways for inheritance disputes

Ensuring superannuation death benefit nominations are up to date is unlikely to feature high on your clients’ priority list. Understandably, it can become all too easy to set and forget.

Key takeaways for SMSFs

superannuation – while not part of an estate – can form part of a deceased’s notional estate in New South Wales
non-lapsing binding death benefit nominations continue to be valid, but remain at risk of family provision claims in New South Wales
ensure binding death benefit nominations are kept up to date and under review as circumstances change
care must be taken when incorporating binding death benefit nomination provisions into a trust deed to avoid unintended consequences
family provision orders can be made in favour of the ‘well-to-do’^[1], and not just the impecunious, where estates (and super balances) are large

Recent cases provide a timely reminder that SMSFs continue to be at risk of dispute among beneficiaries and dependants of a deceased member. The autonomous nature of SMSFs, where members are typically also the trustees, often complicate their administration in life and death. Unsurprisingly, inheritance disputes involving family members arise, given their use as vehicles for wealth accumulation, and the complex web of superannuation and tax laws that regulate them.

Application of reg 6.17(A)

The High Court’s decision in Hill v Zuda Pty Ltd^[2] that reg 6.17(A) of the Superannuation Industry (Supervision) Regulations 1994 (Cth) has no application to an SMSF, comes as welcome news to industry participants. A practical implication of the decision is that non-lapsing binding death benefit nominations (BDBN) can continue to be valid, rather than ineffective after three years, or less if the trust deed allows.^[3]

The Full Court concluded the two purposes of regulation 6.17(A), namely compelling trustees to distribute death benefits in accordance with member wishes, and ensuring that members have sufficient information, are not suitable for the administration of an SMSF.^[4]

It reasoned that given an SMSF is, by definition, a superannuation fund in which members of the fund are also directors of the corporate trustee of the fund, providing notice of the kind envisaged by reg 6.17A(4), (6) and (7) would be ‘at best an exercise in formality and at worst redundant’.^[5]

Failing to revoke a BDBN

The High Court’s decision comes not long after the NSW Supreme Court case of Benz v Armstrong^[6], which involved the deceased executing a BDBN in favour of his second wife, within three years of his death. In that case, the Court affirmed that superannuation proceeds of an SMSF could form part of a deceased’s notional estate, capable of designation for the purpose of making a family provision order.^[7]

Chief Justice Ward concluded that the deceased’s failure to revoke a BDBN (and nominate his estate) was a relevant property transaction under the Succession Act 2006 (NSW), analogous to a failure to sever a joint tenancy at the date of death.^[8] Orders for provision in favour of the plaintiff children were subsequently made, despite the deceased’s Will expressly directing the trustee to pass $12.9 million of member benefits to his second wife.

Specialist professional advice is recommended as we see the increasing disparity in intergenerational wealth, and the incidence of blended families, among key contributors to inheritance disputes involving SMSFs. Please contact us if you need assistance in navigating these complex issues.

^[1] Vigolo v Bostin (2005) 221 CLR 191; [2005] HCA 11 at [51]
^[2] Hill v Zuda Pty Ltd [2022] HCA 21
^[3] Regulation 6.17A(7) of the Superannuation Industry (Supervision) Regulations 1994 (Cth)
^[4] Hill v Zuda Pty Ltd [2022] HCA 21 at [32]
^[5] Hill v Zuda Pty Ltd [2022] HCA 21 at [32]
^[6] Benz v Armstrong [2022] NSWSC 534
^[7] Benz v Armstrong [2022] NSWSC 534 at [176]
^[8] Benz v Armstrong [2022] NSWSC 534 at [304]; Ward CJ at [174] reasoned the deceased’s nomination could have been revoked at any time prior to death under reg 6.17A(5)(b) of the Superannuation Industry (Supervision) Regulations 1994 (Cth)