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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 (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.
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 the finding in this case, the absence of a binding written direction from the deceased member of the SMSF, means that the remaining trustees have absolute discretion to pay or apply the deceased member's super savings within the fund 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.
This can be the case even when the deceased fund member had clearly stated that she did not wish her money to be paid to particular individuals. Francesca's will stated that she wished her superannuation to be distributed to her four children.
The case was further complicated because Augusto, having taken legal advice, moved from an individual to a corporate trustee structure. This was done in line with the SIS Act (s. 17(A2)), which states that a single-member SMSF must have a body corporate acting as its trustee. The Act does provide for a six month period of grace following the death of a member.
To learn how to change from Individual Trustees to a Corporate Truste, click here.
The Master of the Court could have used the SIS Act to appoint a legal representative of the deceased member to act as a director of the corporate trustee for the limited period of time until the commencement of the death benefit (spelled out in s 17A(3)(a)(i) (ii)).
Francesca's executors also 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.
However, because Augusto took professional advice, the court found that he did not act with a lack of bona fides. The outcome of this case 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 to his own account.
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?
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.
What do you need to know about Binding Death Nominations?
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 nomination and keep it updated every three years if your trust deed instructs you to do so. You can also have a non-lapsing BDN provided your trust deed allows it.
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.
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 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. To learn how to order a BDN click here.
In most instances, BDBNs can only be made in favour 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.
ATO Interpretive Decision
A recent ATO decision on death benefits clarifies a misunderstanding that may have emanated from the ATO, ATO Interpretive Decision 2014/22, released earlier this month, addressed the question, "Can a taxpayer who is a child beneficiary over 18 years of age be a 'death benefits dependant' of the deceased for the purposes of section 302-195 of the Income Tax Assessment Act 1997 (ITAA 1997)?" To read the interpretive decision, click here.
The taxpayer was, in this case, considered to be a death benefits dependant for the purposes of section 302-195 of the ITAA 1997. In this case the taxpayer (a child of the deceased) was paid a death benefit on the death of the parent. The taxpayer was over 18 years of age at the time of death. The taxpayer had given up work to care for the terminally ill parent and received no financial support from anyone, other than the parent, during that time, the ATO stated.
The taxpayer and parent also satisfied the interdependency relationship requirement under paragraph 302-195(1) (c) and as described in paragraphs 302-200(1)(a),(b),(c) and (d) of the ITAA 1997, the ATO stated. The taxpayer and his parent had a close relationship, they lived together; the parent provided financial support for the taxpayer; and the taxpayer was providing significant care for the parent.
 Usually the view is that an adult child would only be covered if he can establish a financial dependency, which means that you can still get tax-free super for an adult child. The tax-free super will be dependent on either financial dependency... or interdependency.
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For more information, visit onlinesmsfaudit.com.au. For a snapshot presentation by Manoj Abichandani SSA SSAud
