The role of the Member Benefit Guardian is, basically, to ensure death benefits from a SMSF are applied in accordance with the wishes of the deceased member.

Charles and Susan

Charles and Susan, who have been married for 10 years, have their own SMSF. They act as individual trustees of the Fund.

Each was previously married, with children from those relationships:

• Susan has 2 children from her previous marriage, William & Jane; and

• Charles also has 2 children from his previous marriage, Tom & Jerry.

The ages of the 4 children, who (at this stage) live permanently with Charles and Susan, are very similar, ranging from 14 to 16.

Over the years, Charles and Susan have come to consider the children of the other as if they were their own.

Charles and Susan are each receiving a pension from the SMSF, and each also has an accumulation account in the Fund.

Being concerned about their estate planning, Charles and Susan sought advice and put in place:

• reversion of their respective pensions to the other; and

• a Binding Death Benefit Nomination which directs those benefits not subject to reversion to:
• the spouse in the 1st instance; and
• equally amongst the 4 children if the spouse is not living at that time.

Some 3 years later, Susan becomes very ill and passes away. Her pension reverts to Charles, who resolves to retain the balance in Susan’s accumulation account within the Fund, and commence an additional pension from that balance.

Charles seeks advice regarding the trustee structure of the (now) single member Fund and is provided with details of the various options available. As he feels the expense of establishing a company to act as trustee is not warranted, he arranges to have his eldest son, Tom, appointed as the second trustee of the SMSF.

As Tom has recently commenced work, he also becomes a member of the Fund and has his employer contributions paid to the Fund.

At this time, Charles raised the issue of the estate planning exercise conducted 3 years previously, and was advised that the Binding Death Benefit Nomination:

• allows for the instance of Susan predeceasing Charles; and

• provides direction to Tom, in the event of Charles’ death, regarding the payment of the superannuation death benefits.

Not long after the last of the children finds a job and moves out of home, Charles has an accident and passes away as a result of his injuries.

The scenario at this point is that Tom is the sole trustee, with a Binding Death Benefit Nomination directing those benefits to William, Jane, Tom & Jerry.

Any Problems?

Do you notice any Payment Risks at this point? There are a few already, but it is about to get worse.

Tom likes the position of power, and decides he deserves more of his father’s money. He destroys the Binding Death Benefit Nomination with the intention of stating, if asked, that his father had taken it from the files and destroyed it.

Tom adds his girlfriend as the second trustee and the trustees decide to pay the entire benefit to Tom.

Payment Risks

• William & Jane

As William & Jane were not Tom’s children - they were his stepchildren until Susan’s death - they would not meet the SIS definition of ‘child’. They had moved out of home and were working, so it is unlikely they would meet the financial dependency definition, meaning their entitlement under the Binding Death Benefit Nomination would fail, regardless of Tom’s actions.

This may give rise to action against the adviser, who could be expected to have foreseen this eventuality and recommended that the share of William & Jane be paid via Charles’ estate.

• Jerry

Jerry had a valid entitlement but, unless he can prove Tom’s wrongdoing, he has very little grounds for action. Those familiar with the New South Wales Supreme Court case of Katz v Grossman ([2005] NSWSC 934) will note some similarities to Jerry’s position.

What safeguards should have been recommended?

Firstly, as touched on above, both Charles and Susan should have been advised to direct the entitlement of the stepchildren through their estates.

Otherwise, the entitlements under the Binding Death Benefit Nomination were likely to fail.

Unfortunately, had that advice been given and acted upon, Tom’s actions would have still resulted in William & Jane being denied their entitlement.

Member Benefit Guardian

However, had Charles and Susan been advised to appoint a Member Benefit Guardian, Tom may not have succeeded with his plan for 2 main reasons:

• the Member Benefit Guardian may well have had a copy of the Binding Death Benefit Nomination and known Charles had not rescinded it; but, in any event

• the Member Benefit Guardian would need to have approved, in terms of the SMSF trust deed, the payment of the superannuation death benefits.

The degree of protection a Member Benefit Guardian provides when the trustee is paying death benefits can be a very important safeguard.

A Member Benefit Guardian - generally a trusted friend, relative or a professional adviser, does not act as trustee but ensures benefit payments are made as intended. The Member Benefit Guardian would only be involved if:

• Automatic Pension Reversions; or

• Death Benefit Rules; or

• Binding Death Benefit Nominations;

were not in place or not valid.

"The role of a Member Benefit Guardian is to ensure death benefit payments are made as intended."

Conclusion

It is very important that the SMSF trust deed permits the appointment of a Member Benefit Guardian as a means of overseeing the payment of benefits to surviving loved ones.

Utilising the power to appoint a Member Benefit Guardian then becomes an important component of the estate planning process.

The Role of a Member Benefit Guardian in SMSF Estate Planning

Do your clients expect you to have covered the risks to the correct allocation of their superannuation death benefits when they die?

Superannuation Death Benefits

A member’s superannuation balance at the time of their death does not automatically form part of their estate. That balance is generally controlled, following their death, either by the remaining trustees or by specific documentation.

The principal risks to the correct allocation of superannuation death benefits are:

• the risk that the benefits are not paid to the deceased member’s designated/preferred beneficiaries - payment risk; and/or
• the risk that the amount of the benefits paid will be reduced as a result of unnecessary taxation - taxation risk.

This article will cover aspects associated with payment risk, and detail ways to mitigate those risks.

Payment risk

Payment risk occurs because:

• the remaining trustees do not pay the benefits to the intended recipients, or in the correct proportions, either by:
• deliberate action – the often quoted case of Katz v Grossman, and the more recent cases of ‘Conti’ and ‘Morris’ provide examples, to varying degrees, of the remaining trustees not paying the benefits to the individuals the deceased member had intended would receive their benefits; or
• non-deliberate action, such as because of:
• a lack of guidance or instructions provided to the remaining trustees; or
• documentation intended to provide guidance or instructions proving to be faulty and, therefore, of no effect; or
• there are no remaining trustees, leading to the questions such as:
• who will act as trustee? and
• what has happened to the directions provided by the deceased member? or
• the documented beneficiaries:
• are no longer the preferred beneficiaries, e.g. following relationship breakdown; or
• are not eligible under superannuation law to directly receive benefits; or
• have predeceased the member, with no guidance provided as to the succession of those benefits.

Mitigating risk

Methods to reduce those payment risks include:

Reversionary Pensions

The pension automatically becomes payable (‘reverts’) to another person, previously nominated by the member, on the death of that member. That removes the discretion from the surviving trustees. However:

• correct, up to date documentation is required to ensure the reversion can proceed. For example, if a nominated child has turned 18 and commenced working full time since the documentation was prepared, the pension is not permitted to revert;
• who holds the documentation confirming the reversion?
• the recipient needs to be able to become a member and trustee of the fund, if they do not already fill those roles;
• can the reversion be countermanded by any other document? and
• what about accumulation balances held in the deceased member’s name, as accumulation funds are not covered by a pension reversion nomination?

Death Benefit Nominations

There are a range of Death Benefit Nominations, each with a degree of potential risk, including:

• Non-Binding Death Benefit Nominations;
• Lapsing Binding Death Benefit Nominations; and
• Non-Lapsing Binding Death Benefit Nominations

Potential risks include:

• the remaining trustee could:
• ‘lose’ the Binding Death Benefit Nomination, possibly even deliberately; or
• transfer the benefit to another fund, which has no Binding Death Benefit Nominations;
• the Binding Death Benefit Nomination may:
• lapse, and be of no effect; or
• be faulty - e.g. it may not have been correctly witnessed;
• the trust deed may not be sufficiently current to allow the acceptance of appropriate Death Benefit Nominations; or
• the trust deed may be unclear as to whether there is conflict between a Reversionary Pension and a Death Benefit Nomination and, if so, which takes precedence.

There is also a degree of ‘adviser risk’ in regards to the preparation of Death Benefit Nominations. Whilst incorrectly or inappropriately completed documents may result in litigation from disenfranchised beneficiaries, properly completed Death Benefit Nominations can reduce adviser risk, by utilising:

• the flexibility available through a properly prepared Death Benefit Nomination; and
• the introduction of multiple layers of potential beneficiaries to the Nomination.

The Topdocs trust deed provides for a range of Death Benefit Nominations, including quite complex, multi-tiered, arrangements.

Death Benefit Rule

The Death Benefit Rule is similar to a Binding Death Benefit Nomination, the main difference being that the document is effectively ‘built into’ the trust deed. This removes some of the possibly detrimental actions mentioned above, but can be relatively inflexible.

Automatic inclusion of Legal Personal Representative as Trustee

The term ‘legal personal representative’, for a deceased person, refers to the executor of their Will, or administrator of their estate. The person nominated under a Will needs to apply for a Grant of Probate, meaning there would be a delay in that person or persons being in a position to act as trustee of a SMSF.

What if there is a dispute as to whether the ‘last’ Will is valid? Also, what if the deceased left no Will and, as sometimes occurs, a dispute over ‘control’ of the deceased's assets arises between the deceased's family and for example, a person claiming to be a de facto spouse? The actual legal personal representative may not be determined for some months - even years.

Apart from that, the inclusion of the legal personal representative may not be an effective means of control, for example, if there are 2 or 3 other members/trustees of the fund, unless there are specific rules in place regarding voting powers.

Member Benefit Guardian

A Member Benefit Guardian provides a degree of oversight of the trustee actions in regards to death benefits, and can operate in conjunction with Reversionary Pension, Death Benefit Rules and Death Benefit Nominations.

The Member Benefit Guardian could be a trusted friend/relative or a professional adviser, and could hold:

• copies of the Reversionary Pension documents; and
• copies of Death Benefit Nominations;

so as to ensure that payments made by the trustee are in accordance with the wishes of the deceased member.

What happens if the trustee refuses to accept the power of the Member Benefit Guardian? The dispute would need to be settled in Court. In that event, properly drawn provisions in the trust deed will be crucial to the argument. However, it is likely the issue would not reach Court, as the legal personal representative will generally have been added as a trustee of the fund, in the meantime, in accordance with the trustee/member rules.

Conclusion

Maximum protection can be provided, in regards to Reversionary Pensions and Death Benefit Nominations, with the added oversight of a Member Benefit Guardian.

Whilst the amount of documentation ultimately required will depend, on a case by case basis, on the degree of potential risk levels perceived to exist, comfort can be taken from the availability of properly drawn documentation designed to mitigate any risks faced by members, their intended beneficiaries, their advisers and the remaining trustees, concerning the distribution of death benefits.

What should you do now?

We suggest you consider the position of your clients and their SMSF structures and, if necessary:

• update their SMSF trust deed;
• review Reversionary Pension instructions, if applicable;
• review whether Death Benefit Nominations are current and appropriate and, if not, replace them; and
• consider recommending the appointment of a Member Benefit Guardian (a relatively simple form) to your client members.

"The Legal Personal Representative of a deceased person may not be known for some considerable time following the death of a member. The interests of the deceased member, and their beneficiaries, need to be protected from the time of death."

Risks with SMSF Death Benefits

Contrary to a common misunderstanding, an individual’s Superannuation Death Benefits are not directed by their Will. It is vital that an individual’s estate planning considers the special rules applicable to assets they hold in superannuation, as well as their assets outside of superannuation.

What is Estate Planning?

Estate planning can be described as the structuring of an individual’s financial affairs so that, on their eventual death, the person’s potential (and preferred) beneficiaries are cared for financially in the most efficient and cost effective way possible.

With the assets an individual holds in superannuation forming a significant component of their wealth, particularly when insurance benefits are added, consideration as to how a person’s superannuation will be treated on death forms an important part of the estate planning process.

Superannuation Death Benefits - What are they?

Superannuation death benefits are basically the payment to a person from a superannuation fund because the deceased person was a member of that superannuation fund.

The benefits can be paid either from the accumulation account of a deceased member, or from any pension account held for them.

Specific tax concessions, which may not be available in other circumstances, can apply to the payment of superannuation death benefits.

To whom can the benefits be paid?

A superannuation death benefit can be paid, in the first instance, to either the legal personal representative (LPR) of the deceased, or any person who is classified as a dependant under the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’).

If neither a LPR nor any other such dependant exists at the time of the member’s death, a broader category of recipients may be considered.

It is important to note that there are a number of different definitions of ‘dependant’ which apply in the superannuation environment, the two main definitions being:

• dependants under the SIS Act, generally referred to as ‘SIS dependants’; and

• dependants under the Income Tax Assessment Act 1997 (‘Tax Act’), generally referred to as ‘tax dependants’.

A person who is classified as a SIS dependant may not meet the definition of a tax dependant meaning that, although they are entitled to receive a superannuation death benefit, it may be subject to tax. This can particularly impact the children of the deceased.

What is an LPR?

The term ‘legal personal representative’ covers a range of scenarios for people at different stages of their lives but, for a deceased person, it refers to the executor of their Will, or administrator of their estate.

Any superannuation death benefit payment to the LPR will therefore form part of the deceased person’s estate.

Who can be a SIS dependant?

The SIS Act defines a dependant of a deceased member of a superannuation fund as any of:

• the spouse (married or de-facto, and including those in a same-sex relationship provided the relationship has been registered) – there can be more than 1 spouse at a given time;

• any child of the deceased; and

• any person with whom the deceased had an ‘interdependency relationship’.

As the SIS dependant definition is an ‘inclusive’ definition, financial dependency may also meet the definition, in addition to those categories specifically listed above.

What defines a ‘child’?

The range of individuals who may be classified as a child can be quite broad, including:

• adopted, step or ex-nuptial children;

• children of a person’s spouse; and

• children under the broader context of the Family Law Act.

The tax definition of dependent for death benefit purposes limits dependent children to those under 18 years of age.

The ATO, in an Interpretative Decision, ID 2011/77, considered the issue of ‘stepchild’ in the context of the divorce of a child’s natural parent and the step-parent.

The ATO’s decision was that the “relationship of stepchild to step-parent is severed when the marriage between the natural parent and the step-parent ends …”. That would apply either:

• on the death of the natural parent; or

• on the divorce of the natural parent from the step-parent.

The term ‘stepchild’ only applies, as detailed in the ATO decision, in relation to individuals who are legally married. If the couple was in a de-facto relationship, the definition ‘children of a person’s spouse’ would apply (with the same result under the definition, if the relationship ended).

In either of the scenarios outlined above, the stepchild or stepchildren would need to demonstrate some other dependency, such as interdependency or financial dependency, to meet the definition of SIS dependency.

What is required to confirm an interdependency relationship?

Section 10A of the SIS Act states that two persons (whether or not related by family) have an interdependency relationship if:

(a) they have a close personal relationship; and

(b) they live together; and

(c) one or each of them provides the other with financial support; and

(d) one or each of them provides the other with domestic support and personal care.

The only exception permitted to the requirements above relates to the second requirement – that they are living together. If the individuals are unable to live together because of a disability, but meet the other requirements, they will be considered to be in an interdependency relationship.

Can adult children have an interdependency relationship with a parent?

The Superannuation Complaints Tribunal has considered this question, and has determined that it is possible for an interdependency relationship to exist between a parent and their adult child.

This can have significant tax and estate planning consequences when, for example, an individual resides in an interdependency relationship with one of a number of the person’s adult children.

Who can be a financial dependant?

There is no limitation to the range of people who may be financial dependants. As the term ‘financial dependant’ is not defined in either the SIS Act or the SIS Regulations, the fund trustee has the responsibility of determining whether a person was financially dependent on the deceased member at the time of their death, in accordance with any instructions contained in the governing rules, such as the trust deed, of the fund.

The Australian Prudential Regulation Authority (APRA) has stated that partial financial dependency is sufficient to meet the definition of ‘dependant’ for the purposes of the SIS Act and SIS Regulations.

What if there are no SIS dependants surviving the member?

That situation may occur, for example, following the death of a young person who was not in a relationship (as a couple), had no children, had not made a Will and had no assets other than superannuation savings.

In that instance, there is unlikely to be any need for a relative to apply for letters of administration, meaning there will be no LPR to whom the trustee could pay the superannuation death benefit.

So long as the governing rules of the fund permit, the trustee is able to pay the death benefit to another person, such as a parent of the member.

How may the benefits be paid?

Superannuation death benefits can be paid as a lump sum or, in limited circumstances, as a pension. The limitations in regards to the payment of a pension relate to children of the deceased member.

A pension may only be paid to a child if the child:

• is under 18 years of age; or

• is under 25 years of age and is financially dependent on the member; or

• has a disability.

If the payment is to be made in the form of a lump sum, certain timing rules may apply for the payment to be treated as a superannuation death benefit.

When the payment follows the commutation of a pension, including a pension which reverted following the death of a member, it must be paid before the later of:

• 6 months after the date of death; and
• 3 months after the grant of probate or letters of administration.

A lump sum payment made from the member’s accumulation account, regardless of the timing of the payment, will be a superannuation death benefit.

Who decides who will receive the benefits and in what form?

The trustee is considered by many to be the main decider as to the type and amount of superannuation death benefits payable, and the recipient or recipients.

However, in many SMSFs in particular, there is a range of options available to the member, or a trusted adviser, to control the amount and type of superannuation death benefits paid following the death of that member.

Those options include:

• Automatic Reversion of Pensions, in which the pension payable to a member automatically becomes payable to another person (nominated previously by the member) on the death of the member, provided the nominated person is entitled to receive a pension under SIS rules;

• Non-Binding Death Benefit Nominations which are, in effect, suggestions to the trustee as to who the member wishes payment be made, with the ultimate decision left to the discretion of the trustee;

• Non-lapsing Binding Death Benefit Nominations,which remove any discretion from the trustee so long as the nominated recipients are SIS dependants at the time of death of the member.

The Topdocs binding death benefit nominations can be structured to include a direction as to specific assets and/or specific proportions to pass to intended beneficiaries and, in the event of those nominated recipients either not surviving or not being entitled to receive the benefit, a secondary nomination is available.

• Binding Death Benefit Rule, effectively a rule written into the trust deed by the trustee at the request of a member, which sets out the conditions regarding the payment of the benefit at the time of the death of the member.

The Topdocs SMSF trust deed empowers the trustee to accept a request from a member to write a binding death benefit rule, and to amend the deed by writing the rule.

• Member Benefit Guardian, where a member has the option to appoint a Member Benefit Guardian, which prevents the trustee from undertaking certain actions without the written consent of the Guardian.

If appointed, a Member Benefit Guardian’s consent would be required by the trustee prior to making superannuation death benefit payments, where neither a reversionary pension nor a valid binding death benefit nomination is in place.

The Topdocs SMSF trust deed provides for the appointment by each member of a Member Benefit Guardian, should they wish to do so.

What benefit can a Member Benefit Guardian provide?

In a close family, the need to appoint a Member Benefit Guardian may not seem to be an issue. However, let us consider the case of Katz v Grossman where, briefly, benefits which were assumed to pass equally to the 2 children of the deceased member were actually paid, at the discretion of the trustees, all to the one child who also happened to be a trustee of the fund (with her husband as the other trustee).

Had either a trusted friend, or even the other child, been appointed as a Member Benefit Guardian, the trustees could not have made the payment without the consent of the Member Benefit Guardian. In the case of Katz v Grossman, it is more likely that the intended equal distribution would have occurred, because of the oversight of the Member Benefit Guardian.

Planning for the payment of superannuation death benefits

The Topdocs SMSF trust deed and related documentation can assist in providing a degree of certainty to the estate planning process, through enabling members to

Superannuation Death Benefits - A vital component of Estate Planning