Lawyer, Accountant and Financial Adviser make defective Binding Death Benefit Nomination with disastrous consequences…
A significant case in the world of SMSF death benefit planning was handed down on the25th March last by the Supreme Court of Queensland in the case of Munro V Munro.
The decision of the Court provides an ominous warning to both Accountants, Financial Planners and in fact Lawyers who get it wrong when it comes to preparing death benefit nominations for Self Managed Super Funds (SMSFs) particularly as the Court takes a very narrow and strict interpretation on the form and content of any death benefit nomination when viewed with the Governing Rules of the Fund.
The case of Munro involves the deceased person who was in fact a Solicitor. Mr Munro was married to his wife Patricia of a 2nd relationship and on his death was survived by two children from a former relationship namely Vanessa and Elke. Mr and Mrs Munro were the Member Trustees of the SMSF described as the “Barry and Susie Super Fund”.
Mr Munro had minimal assets in his estate and a debt of about $8,000, although there were jointly held property which passed to Mrs Munro outside of the estate. It was apparent however that most of Mr Munro’s wealth was contained in his SMSF. He made a Will appointing his wife and his daughters Vanessa and Elke as Executors of his estate and his Will directed that his estate including any superannuation benefits and insurance payable upon his death should be distributed as between his wife (who was to receive a specific gift of $350,000) and his two daughters Vanessa and Elke as to the balance of his estate in equal shares.
Mr Munro’s financial affairs were managed by his Accountant who provided financial planning services.
In July 2009 the Accounting Firm wrote to Mr Munro recommending that he prepare a binding death benefit nomination in order to guarantee that his wishes would be carried out upon death. The firm sent out a form of a binding death benefit nomination. A section on the form allowed for a specification of a nominated Beneficiary. Mr Munro typed in this part of the form “Trustee of deceased estate” and the percentage of benefit to be received was designated as “100%”. It is apparent that the form was signed by Mr Munro in the presence of his wife and one of his daughters and the form returned to his Accountant/Financial Advisor.
Following his death Mrs Munro appointed her daughter from a previous relationship as a replacement Trustee of the SMSF to ensure that the Fund maintained its complying status and gave notice to Mr Munro’s daughters Vanessa and Elke that the binding death benefit nomination was defective and intended to distribute the superannuation benefits as a discretionary nomination as they saw fit, presumably to Mrs Munro.
Mr Munro’s daughters issued proceedings against their stepmother claiming that the superannuation benefits should be paid to the estate where Mr Munro’s Will would apportion the death benefits as between themselves and Mrs Munro in the manner set out in the Will.
The Court took the view, agreeing with the wife, that the death benefit nomination was not a valid binding death benefit nomination for the following reasons:
(a) The provisions of the SIS Act which set out the form of binding death benefit nomination in Section 59 do not apply to SMSFs. The Court agreed with the ATO’s view on this as set out in SMSFD 2008 /3;
(b) Reference to “Trustee of deceased estate” on the binding death benefit nomination form was not correct. The Deed purported to follow Regulation 6.22 of the SIS Actregulations which permitted the death benefit to be paid to a “Dependant or Legal Personal Representative”. These provisions, the Court said, were prescriptive. “Legal Personal Representative” means Executor of the Will of a deceased person;
(c) Although the term “Executor” and “Trustee” are used interchangeably their roles are different. For example the same person who is appointed Executor of an estate and administers the assets immediately following death may become the Trustee for the purposes of holding the estate moneys on Trust after administration duties are completed;
(d) The court said that while Mr Munro may have intended by instructing the form to be completed with “Trustee of deceased estate” to mean his Executors, it was difficult to reach that conclusion when the form itself provided the option of specifying a legal personal representative and how to complete the form. Specifically, the form stated “when you nominate your Executor you should enter Legal Personal Representative in the relation column”;
(e) A binding death benefit form should be construed on its face having regard to the terms of the Trust Deed and it is not appropriate to construe the nomination form by reference to the Will. The Will was equivocal as to whether to Munro anticipated that the Executors would be paid death benefit from the fund or to take the receipt of the death benefit into account when making the distributions under the Will because of the adjustment Clauses in the Will;
(f) The death benefit nomination form should be clear because the Deed allows the Trustee on death to determine whether the death benefit should be paid within its discretion and whether that discretion was restricted by a binding death benefit nomination. Accordingly, the form of nomination must strictly adhere to the terms of the Deed and there is no power given to the Trustees under the Trust Deed to dispense with the formal requirements of completing a binding death benefit nomination.
The case gives rise to very important lessons when it comes to preparing binding death benefit nominations for self managed super fund:-
- Accountants and Financial Planners and possibly Lawyers not familiar with the Superannuation Laws should not attempt to hold out or participate in completing any binding death benefit nomination unless they are fully familiar with the rules of the Fund.
- As the case has just been handed down and has had an adverse outcome as far as the children of the deceased are concerned, it now leaves open the opportunity for the children to bring legal proceedings against the Financial Planner and Accountant as disappointed Beneficiaries of the deceased on the basis that the Adviser had failed in his duty of care to ensure that the binding death benefit nomination, that they recommended Mr Munro complete in May of 2006, was in fact made binding. The Accountant and Financial Planner of the deceased had been his Financial Adviser for a period of at least 6 years.
- The Courts are taking a very strict approach in the form and content of a binding death benefit nomination as they apply to the Governing Rules of the Fund and have now raised the bar on the previous Queensland case of Donovan where the deceased Member tried to make a binding death benefit nomination via a letter which did not comply with the form prescribed by the Deed.
- Blended families are fertile ground for disputes particularly where the Members of the SMSF are also Trustees and where a death benefit nomination has been not be binding. In the Munro daughter of the surviving wife was appointed as replacement Trustee for the purposes of determining the payment of the death benefits. This gave ground to opportunity when the death benefit nomination was not made binding.
Hill Legal – Lawyers and Consultants
The material contained in this publication is general reading only information and does not constitute advice on the subject matter. While every effort has been made to ensure accuracy, you should not rely on the information provided without seeking professional specialist SMSF advice on your individual needs and circumstances and the relevance and appropriateness of the ideas and strategies mentioned. No
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ISSUE – April 2015