Is Your Superannuation Protected By Your Will? Think Again!

A recent Supreme Court decision highlights the problems that may arise for a deceased’s estate, when the terms of a Will and those of a superannuation fund are in conflict.

In this case, a married but apparently estranged couple were trustees of a self-managed superannuation fund (“SMSF”)* and both had entitlements in the SMSF. The wife had specifically stated in her Will (made in January 2005) that she did not want the entitlements in the SMSF paid to her husband and instead gifted the entitlements to her children.

While the wife purportedly made 2 previous death benefit nominations in 2002 and 2006, these had lapsed. Accordingly, no binding death benefit nomination detailing her wishes was in force at the time of her death on 5 August 2010.

The husband (as the surviving trustee of the SMSF) appointed a corporate trustee as the sole trustee of the fund on 4 February 2011 to satisfy section 17A(2) of the Superannuation Industry (Supervision) Act (“SIS Act”). He was also the sole Director of this new corporate trustee.

Under the terms of the trust deed of the SMSF, when there is no binding death benefit nomination, the trustee has absolute discretion to pay “the credit of a deceased member’s account to a spouse or child of the member or any other person who in the opinion of the trustee(s) was a dependent of the member at the relevant time”. In this case, the husband as the sole Director of the Corporate Trustee exercised this discretion and paid his late wife’s entitlements (amounting to around $650,000) to himself and not to their children.

The children as executors of the late wife’s estate took legal proceedings against their father in relation to this decision. In particular, they argued that as specified in section 17A of the SIS Act, they were entitled to be appointed as co-trustees of the SMSF. Consequently, had they been appointed co-trustees, they would also have been able to wield influence on the payment of the death benefit.

The Court held that:

(i) the Corporate Trustee of the SMSF was entitled to ignore the deceased’s direction in her will and the mere fact of doing so could not in itself be evidence of a lack of bona fides or good faith; and
(ii) the Corporate Trustee was not obliged to appoint the executors as a co-trustee.

As such, the children could not receive any of the entitlements which went to their father.

What then are the key estate planning lessons to be learnt from this decision?
The case serves as a reminder that a will does not override the discretionary power of a superannuation fund trustee to determine the payment of the superannuation benefits as per the trust deed and superannuation laws.

If you have superannuation and in particular a SMSF, you need to understand that your SMSF does not automatically form part of your estate on your death. You must direct those entitlements via a binding death benefit nomination rather than a Will.

Please contact James Kelly to discuss this issue and to make sure your intentions can be carried out in relation to SMSFs and how this interplays with your other assets and your Will.

*There are about 500,000 SMSFs in Australia at present.