Saturday, 30 July 2011

07 - Dying for a dispute over super

William Buck
June 2011
National Newsletter

Be Informed
The Winter Edition 

07 - Dying for a dispute over super

The media recently reported that the main area of dispute in relation to superannuation is the distribution of benefits on death.

As a matter of law, a person's benefits in, and the assets of, a superannuation fund will not form part of the member's estate on their death (even if it is a self-managed superannuation fund). Accordingly, it is not possible for the member to gift those benefits/assets (Death Benefit) under their Will. Therefore, other steps must be taken in order to properly deal with a member's superannuation on their death.

Normally, the rules of a superannuation fund regarding the death benefit generally give the fund trustee the discretion to pay the Death Benefit in whatever proportions the fund trustee decides to any one or more of:

— the member's 'dependants' (which include their spouse, children
     and anyone who is financially dependant on the member); and
— the member's legal personal representative (i.e. their estate)

While this flexibility can be advantageous, it is also potentially open to abuse, or significant disputes and delays unless further steps are taken.

It is possible to restrict the fund trustee's discretion, or force the fund trustee to deal with Death Benefits in a specific way, by having a valid Binding Death Benefit Nomination in place at the time of death. It is one thing to have a valid Binding Nomination in place, but another to have the right one in place.

Unfortunately, it is common for 'standard' Binding Death Benefit Nominations to be used. In our view, no Binding Nomination should ever be prepared without a complete review of the member's circumstances, estate planning objectives and arrangements and the Fund's rules.

Examples of some issues that need to be considered before preparing a Binding Nomination include:

— Is there a power under the Fund's rules to actually make a Binding Nomination? If so, what type of Binding
     Nominations do the Fund's rules allow?
— Who are likely to be the member's death benefit dependants, allowing the Death Benefit to be paid tax-
— Are any of the member's children under the age of 25 or disabled, so that the Death Benefit can be paid in
     the form of a pension (if appropriate)?
— Will the intended beneficiaries need to access the Death Benefit quickly (e.g. to pay bills etc), in which case
     it may be best to direct it away from the estate (given potential delays obtaining probate)?
— Is it better to pay the Death Benefit to the member's estate and for it to be distributed in accordance with the
     terms of the Will? Has the Will been properly prepared and executed to deal with this Benefit?
— Is it better to have some flexibility so that the fund trustee can choose the most appropriate options at the
— Who will be the fund trustee(s) on the member's death? Can they be changed? Is it appropriate for them to
     have any discretion as to the distribution of the Death Benefit?
— If the death benefit is left to a spouse, what form must the Benefit be paid and are there any second
     marriage or asset protection matters to be considered?

The answers to the above questions and more will not only affect the drafting of the Binding Nomination, but potentially also the member's estate planning documents and the Fund's rules, which clearly require the input of a specialist.

Still happy to go it alone? If so, just remember, the problem with Binding Death Benefit Nominations is that they are binding. Get them wrong and you are stuck with the consequences.

If you would like to review your Binding Nomination, please contact your William Buck advisor.

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