WATERSHED CASE RAISES QUESTIONS ABOUT THE VALIDITY OF MANY DEATH BENEFIT NOMINATIONS On the 24th August 2018 the Queensland Supreme Court handed down a judgment in the case of Narumon Pty Ltd as Trustee for the John Giles Superannuation Fund (the Narumon case) that is likely to cause shockwaves in the SMSF Deed and document industry with potential risks to Advisers preparing and managing documents for clients with SMSF’s. The case also highlights five (5) growing trends in the SMSF industry, namely: (a) An ageing population and issues of control of the SMSF when a Member loses capacity; (b) The noticeable absence of a complete and accurate SMSF document trail; (c) More conflicted blended families holding SMSF balances; (d) The growing amount of superannuation assets relative to estate assets; and (e) The desire by some Beneficiaries to pull the super assets to the estate where they can more effectively be challenged. THE FACTS • Mr John Giles operated a single Member SMSF that was established in 1992; • In June 2013 Mr Giles’ mental health began to deteriorate to a point where in November 2013 his psychiatrist declared him as incapable of making financial, health and lifestyle decisions. From this time on, Mrs Giles and her Sister-in-Law Mrs Keenan acted as replacement Directors of the Corporate Trustee pursuant to Mr Giles’ Enduring Power of Attorney. They also became Members    of the Fund around this time. • Mr Giles died in June 2017 aged 80. • He was survived by his Wife Mrs Narumon Giles, his Son Nicholas aged 16 and four adult Children from a previous marriage. • At the time of his death the Super Fund had an accumulation account balance of about $1 million and a lifetime complying pension worth about $3 million. • Mr Giles left a Will appointing his Wife Mrs Giles and his Sister Roselyn Keenan as Executors although they renounced their right to hold the office as Executors following Mr Giles death. • A family provision claim was made against the estate worth approximately $200,000 by one of Mr Giles adult Daughters. • There were a number of administration issues of the Fund that prompted Mrs Giles to make an application to the Court to seek directions. In particular:- (a) Whether the Deed of Variation of the Trust Deed in 2007 was valid; (b) The consequence of missing documentation relating to the establishment of the complying lifetime pension and whether Mrs Giles was to receive the benefit of a reversionary pension; and (c) Whether a Binding Death Benefit Nomination signed by Mr Giles’ Attorneys in 2016 was valid and binding. Presumably, these issues would impact on whether any of the SMSF assets became part of an estate in dispute. ISSUES ARISING FROM THE CASE The validity of Deed updates 1. It was apparent in this case, consistent with the earlier cases of Perry -vNicholson and Moss Super Pty Ltd -vHayne that a Court will first review the history of old Deed updates before reviewing any current documents on questions relating to Death Benefit Nominations or Reversionary Pension documents. Any technical defect in the process of upgrading a Trust Deed or a Deed appointing a new Trustee can invalidate subsequent documents created from a defective changing Deed such as Binding Death Benefit Nominations or Reversionary Pension documents. In this case the Court reviewed the history of 5 Trust Deed Variations that changed the appointment of Trustee and updated the Trust Deed and found them to be valid and effective. Improper signing of documents 2. One of the issues in this case was that in June 2007 the Trust Deed was upgraded by a Deed of Variation that was signed by Mr Giles “as its authorised representative”. The Deed was not signed by Mr Giles in his capacity as Director and Secretary of the company (which he was) as required by section 127 of the Corporations Act. It was argued that the Deed upgrade was invalid because of its improper signing and the Court agreed with this argument. However, the Court also agreed that a subsequent Deed of Variation made in 2014 purporting to ratify the 2007 Deed, by reference to the powers of an earlier Deed made in 2004 was valid and effective.  Missing pension documents 3. Typical with many clients who have SMSF’s in retirement phase, at the time of Mr Giles death there was reference in the financial statements to Mr Giles receiving a Lifetime Complying Pension however the original pension documents had gone missing and could not be located. The financial statements also made reference to Mrs Giles being nominated as the Reversionary Beneficiary. There were no documents found relating to the establishment of the pension although there was correspondence between Mr Giles and a former Adviser going back to 2000 containing advice regarding the commencement of a pension with the nomination of Mrs Giles of that pension income. There was also evidence of an actuarial certificate in April 2007. Further, there was there no evidence of any change of the pension. The Court found that despite the absence of the original documentation there was sufficient extrinsic evidence of the establishment of the Complying Pension and the nomination of Mrs Giles as the Reversionary Beneficiary of that pension. As a result, Mrs Giles was entitled to receive the benefit of the $3 million reversionary pension. Defective Binding Death Benefit Nominations – Does a payment to a non–SIS Dependant make the Nomination invalid? 1. In this case Mr Giles made five (5) Binding Death Benefit Nominations between 2010 and 2013. These Nominations purported to deal with the accumulation balance of the Fund of approximately $1 million. What was interesting was that four (4) of the Nominations, including the last one made in June 2013, left benefits to a non-superannuation Dependant. In particular, 47.5% was left to Mrs Giles, 47.5% to his son Nicholas and the remaining 5% to his sister Mrs Keenan, who, according to the superannuation laws, did not qualify to be … Continue reading 2018 September Super Brief