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A current Binding Death Nomination is potentially all that stands between your SMSF clients and a Shakespearean family tragedy. A recent WA Supreme Court finding clearly demonstrates why all SMSF members need to ensure they have Binding Death Nominations in place and that those nominations are kept current.
The case in question (IOPPOLO & HESFORD -v- CONTI [2013] WASC 389) was initiated by plaintiffs acting as executors for the Estate of the late Francesca Conti against Francesca's husband, (Augusto) who was the only remaining member of the couple's SMSF.
Francesca's executors were basically applying to the court to be appointed trustees of her and Augusto's SMSF. The question addressed by the court was whether or not the surviving member of the SMSF, Augusto, was obliged to appoint his wife's executors as trustee.
The second matter addressed in the case was whether or not the fund's surviving member had to distribute the deceased member's "interests" in the SMSF in accordance with her will.
The upshot of the ruling in this case, which will now stand as a Common Law precedent, was that the surviving member of the SMSF was not obliged to appoint his deceased wife's executor as a trustee of the fund, and that he was also entitled to distribute her interest in the fund at his discretion, not necessarily in accordance with her will.
Again, this case challenges the commonly-held misconception that a Will can determine how a deceased person's superannuation will be dealt with.
Fortunately, there is an inexpensive and simple solution to this problem that every accountant and financial planner should be recommending to all of their SMSF clients. It is called a Binding Death Nomination.
However, before we get to the solution, let's look more closely at the findings of this particular case and examine what they can help us to teach our SMSF clients.
In making his judgment, the WA Supreme Court Master, Craig Sanderson stated that, as with any legal construct, problems can arise in the administration of an SMSF.
"Mercifully such disputes seem rare. But this case is an example of how problems can arise within a family and lead to disputes relating to a superannuation fund," Sanderson said.
 Replacing Trustee after death
Francesca and Augusto had established their SMSF in 2002. They were the only members and trustees. Francesca passed away in 2010. She had made a will in 2005, upon which probate was granted to the plaintiffs as executors in October 2010. The amount in the SMSF credited to Francesca's account at the time of her death was over $600,000.
According to WA Supreme Court Master, Craig Sanderson: "Under the superannuation deed rules, absent a binding written direction from a deceased member, the trustees may in their absolute discretion pay or apply the amount of the fund standing to 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 trustees was dependent on the member at the relevant date. As at the date of death of the deceased there was no binding written direction given by the deceased."
According to Sanderson, Francesca's will clearly stated that she did not want any of her superannuation paid to her husband. Her will stated that she wished her superannuation to be distributed to her four children.
Both Augusto, as defendant and his wife's executors as plaintiff, understood that the couple's SMSF trust deed did give the surviving trustee the discretion to carry out the wishes expressed in his wife's will, but he was under no obligation to do so.
Shortly after his wife's death in 2011, Augusto established Augusto Investments Pty Ltd (second defendant) as corporate trustee of the fund.
"In this case the second defendant as sole trustee of the fund determined the monies standing in the deceased's account should be paid to the first defendant and not to the beneficiaries mentioned in the deceased's will," Master Sanderson explained.
Sanderson's ruling in this matter includes a detailed explanation of s 17A of the SIS Act, which seems to explain how, as the sole remaining member of the SMSF, defendant Augusto was able to justify setting up the corporate trustee. The SIS Act (s 17A(2)), in fact, states that a single-member SMSF must have a body corporate acting as its trustee.
"The single member of the fund must be the sole director of that body corporate save in a situation where a relative of the member is also a director of the body corporate."
However, he does go on to say that Section 17A(3) allows for the possibility of the 'legal personal representative' of a deceased fund member being appointed as a trustee for a limited amount of time (spelled out in s 17A(3)(a)(i) (ii)).
In other words, an SMSF with between two and five members, in the event that one member dies If there is a fund which has two or up to four members and one of the members dies -- the deceased member's executor can be appointed as a trustee.
They can act as a trustee but they don't become a member of the fund, simply a representative of the deceased member until the commencement of the death benefit payment. After which time, the executor must be removed from the position of trustee and the fund closed down.
Single member funds
Of course, when it comes to interpreting legislation as complex as the SIS Act, every statement that looks like a sensible conclusion must be followed with "but" when one reads the next subsection.
Section 17A(4), for instance, goes on to provide what Sanderson describes as a "breathing space" if, for example, one member of a two-member SMSF dies. Subsection 4 gives the remaining member six months to introduce new members or convert to a single member fund with a corporate trustee of which the single member is sole director. In this case the defendant took advantage of s 17A(4).
The plaintiffs in the case applied to cross-examine the defendant in order to prove he had acted in bad faith. Their application was declined on the basis that it was made after the plaintiffs had filed their statement of readiness.
The main argument put by Francesca's executors to explain why they should be appointed trustees to the SMSF was that, in accordance with s 17A of the SIS Act, it was necessary to ensure the fund remained compliant. They argued that the only way the SMSF could continue to meet the basic requirements as spelt out in s 17A, with particular reference to s 17A(1)(d)(i) was for the appointment of the executor as a trustee.
Sanderson found to the contrary: Section 17A(3) allows for the appointment of an executor as a trustee of the fund but does not in its terms require such an appointment. Section 17A(4) provides a period of grace - that is to say it allows a fund six months to organize its affairs so it can remain a SMSF. So in the case of a fund which has two members and which would qualify under s 17A(1), on the death of one of the members it remains a SMSF for six months.
Remember when one of two trustee dies and the remining trustee resigns to appoint a corporate trustee, the SMSF trust deed will need to be updated to. Click here to learn more.
Sanderson: "If the remaining member has not taken some steps during that period to bring the fund within the terms of s 17A(2) then it will cease to be a SMSF. In this case Mr Conti appointed a corporate trustee and the fund remained a SMSF. The fund remained a SMSF because it migrated from the type of fund covered in s 17A(1) to a fund covered by s 17A(2)."
Francesca's executors then attempted to argue that Augusto had not carried out his duties as trustee in a "bone fide manner" as required by cl 21.2 of the fund's deed. The onus of proof was, of course, on the plaintiff to provide evidence that Augusto had not exercised his powers or rights in a bone fide manner.
Accordingly Sanderson came to the conclusion that "There is simply no evidence that was not done in this case. Before exercising his discretion the first defendant took advice. He had his solicitor instruct tax specialists ... as to his rights and obligations...This advice makes it plain Mr. Conti was quite within his rights to have the trustee make payment to him ... It is difficult to see how the first or second defendants could be said to be acting with a lack of bona fides when they had taken advice from a specialist."
Augusto Conti's position was further strengthened as he was able to point to a document entitled 'Application for Membership of Conti Superannuation Fund'. Under the heading 'Nomination of Beneficiaries' there is a direction to the trustees to pay any death benefit to the first defendant. Whilst this document couldn't be considered a binding death nomination, it was clearly a direction made by Francesca "to which the trustee was entitled to have regard when determining to whom the benefit ought to be paid".
Lapsing binding death nomination
In fact, Francesca had made two binding death nominations in 2002 and 2006, both directing the trustee to pay benefits to her husband Augusto. However, because a binding beneficiary nomination lapses after three years, neither was binding at the time of her death. One was still in place at the time Francesca made her will, so if her death had occurred within the three-years from 2006 to 2009, the trustee would've been required to adhere to the binding nomination. It could not have fulfilled the wishes expressed in her will.
The third submission made by the plaintiffs was to seek to have one of them appointed as a trustee under Sec 77 of the Trustees Act 1962 (WA). Sanderson found that the plaintiffs had "no good reason" for that application. "I am not satisfied the trustee acted with a lack of bone fides or in any way improperly. There are no grounds for appointing an additional trustee.
"Moreover, to do so would sow the seeds of disaster. It would result in there being one corporate trustee aligned with the first defendant and one individual trustee aligned with the beneficiaries under the will. There is no mechanism for resolving the inevitable disputes that would arise in this situation. In such circumstances there would have to be a compelling reason to appoint an additional trustee."
The plaintiff's final application for a review of the discretion exercised by the trustee, was also rejected by Sanderson.
The outcome was that the defendant, Augusto Conti, was found to be acting perfectly within his rights by switching to a corporate trustee and then by using the trustee's discretion to distribute the deceased member's account balance.
We can all, as professional SMSF accountants and advisers, cross our fingers that such a dire situation would not occur within the families of our own clients. However, how many of your SMSF clients have current and binding death nominations?
We strongly recommend all accountants and advisers working in the SMSF space should conduct a review of their SMSF client death nominations to ensure disasters like the one in the Conti case can be avoided.
 Our system instantly generates a binding death nomination, click here learn more, and other related documents like an information kit and instruction sheet on what to do next. The documents are instantly emailed to you and the cost is a mere $55.
All SMSF members need to clearly understand that the payment of their death benefit is determined by the fund's trustee, not by the wishes expressed in their will. The only way to ensure their wishes are fulfilled is to have a binding death benefit nomination (BDBN) and keep it updated every three years or have a non-lapsing BDBN if permitted by their super fund trust deed.
A binding death benefit nomination is a notice given by a super fund member to the trustee of their super fund requiring a death benefit to be paid to one or more dependent(s) and/or legal personal representative nominated by that member in the specified proportion. In the absence of a valid BDBN, the trustee(s) of the super fund will have discretion to determine the recipients of member's death benefit.
In most instances, BDBNs can only be made in favor of a deceased member's: dependants, including their spouse, children including adopted children, stepchildren, ex-nuptial children and children of the person's spouse), or any other person with whom the member has an interdependency relationship at the time of death.
There is no limit to the number of dependents that may be nominated. The only restriction is that the various percentages applied to each dependent and, if nominated, the legal personal representative of the deceased member should add up to 100%.
Before a Binding Death Benefit Notice is put in place, member must check if the funds deed allows this and it should comply with rules contained in their super fund deed and other legislative requirements. Read more about BDBNs here.
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Let's start with the trust deed. 
This is the area in which the SMSF trustee must ensure they don't cross the very fine line drawn between investing in a business and using their SMSF to run a business. The former is acceptable, the latter, it could be legally argued, does not align to either a core or ancillary purpose under the sole purpose test.
The SIS Act also sets out very clear rules in regard to related-party transactions that accountants and advisers need to consider when guiding SMSF clients about investing in businesses and unlisted private companies.
In-house assets include: loans to a related party; an investment in a related party; an SMSF asset that's subject to a lease between the trustee and a related party.
