29/03/2012

Adam and Eve have a SMSF with a corporate trustee. Adam dies leaving Eve as the sole member of the Fund and the sole director and shareholder of the trustee company.

In her Will Eve appoints their two sons and only children Cain and Abel as joint executors and equal beneficiaries of her estate. She does not leave a Binding Death Benefit Nomination.

Because Cain and Abel are to share Eve’s estate equally, on her death they become joint owners of her shares in the SMSF Trustee. Furthemore, because she appointed them as joint owners rather than actually gifting her shares separately to them, they own the shares jointly.

This all seems wise on the face of it. Eve had read about the case of Katz v Grossman [2005].  In that case, after his wife died, Mr Katz appointed only one of their children, the daughter, as co-trustee of the super fund. Then when Mr Katz died, his daughter appointed her husband as trustee of the fund and they both resolved to pay all of Mr Katz’s super to herself to the exclusion of her brother, regardless of Mr Katz’ request that she ensure that she shared the money with her brother.

But despite Eve’s concerns to avoid trouble she had not gone far enough.  The constitution of the super fund trustee company stated that if more than one joint holder of a share is present at a meeting of members of the company, then "that one of the joint owners so present whose name stands first in order in the Register in respect of such share shall be entitled to vote in respect thereof".  In other words the first registered joint owner gets to vote the shares and the other joint owner gets no vote.

On hearing about this Cain organises to be listed first in the share register as joint owner with his brother Abel. He then controls the company because any meeting of shareholders that both Cain and Abel attend will only recognise Cain’s vote on the shares as the first registered joint holder.

In the worst case Cain and his wife can plot to:

• remove Abel as a director of both companies;
• appoint Cain’s wife as the replacement;
• pay all of Eve’s super fund death benefits directly to Cain as a non-death benefit dependant; and
• leave Abel without any entitlement from the SMSF.
  

Katz v Grossman showed the folly of parents appointing only one of their children to a position of power in their estate planning provisions in the belief that they will look after their sibling.

Our story about Adam and Eve’s super fund shows the importance of checking the provisions in the constitutions of trustee companies to ensure they match the couple’s intentions as stated in their Wills.

Of course making a Binding Death Benefit Nomination to ensure there is a legally enforceable arrangement in place to directly gift super benefits separately to each child also makes a lot of sense and can avoid unpleasant repercussions for families in future.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.