27/11/2013

SMSF Trustees often hear the warnings of the importance of estate planning.  When trying to bring home the reasoning behind this, case studies are generally the most persuasive tool since Trustees won't be around to fix things up themselves.  

Careful planning is required or the consequences can be disastrous.  When a Trustee of a retail or industry fund decides to pay a superannuation death benefit this may be contested through the Superannuation Complaints Tribunal ('SCT').  If it is the Trustee of an SMSF making that payment of a death benefit and there is an objection it cannot be taken to the SCT and will end up in the Courts.

A recent case decided in the Western Australia Supreme Court regarding the payment of death benefits from an SMSF graphically highlights what can go wrong.

Ioppolo & Hesford v Conti - decided 24 October 2013

•    Mr and Mrs Conti operated an SMSF of which they were the only members and individual trustees.
•    Mrs Conti died on 5 August 2010, leaving a valid Will.
•    Mrs Conti believed she had left her superannuation benefits to her children as she had specifically said so in her Will and also said that Mr Conti was not to receive those benefits.

•    Mr Conti, on the facts, did not appear to be the children's biological father.  

•    Mr Conti received the entire member account balance which was paid to him by the corporate trustee of the SMSF (of which he was the sole director).

•    Mrs Conti's four children commenced proceedings in the WA Supreme Court.
•    The children claimed:
-    benefits should be paid in accordance with the intentions outlined in Mrs Conti's Will (to them); and
-    Mr Conti was obligated to appoint one of them as executor to be a trustee of the SMSF (pursuant to s17A of the SIS Act, s77 Trustees Act 1962 (WA)).

Should super be paid in accordance with the will?

•    We all know that super does not form part of a person’s estate.  There were no valid binding death benefit nominations in place from Mrs Conti however the will stated all entitlements under the SMSF were to be paid to the children and specifically noted not to her husband Mr Conti.
•    The children (plaintiffs) and husband, Mr Conti (defendant) agreed that 'the trustees of the fund are entitled but not bound to take into account the desires of a deceased member expressed in a will'.
•    The husband as sole director of the corporate trustee used trustee discretion to determine that Mrs Conti's benefits be paid to him as the spouse (as allowed under the trust deed of the fund).

Must the executor be appointed as trustee?

•    The children claimed that the trustee 'was obliged to appoint one of the executors of the deceased's estate as a trustee of the superannuation fund' as the trust deed required the fund to remain an SMSF.  They argued that section 17A(1)(d)(i) of the SIS Act indicated that appointing the executor as a trustee was the only way that could be achieved.  They argued that appointing the executor was obligatory.
•    The Court disagreed and said there was no support for that view in terms of s17A(1)(d)(i) or 'in the overall thrust of s17A'.
•    The judgement makes clear that s17A(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 fund six months to organise its affairs so it can remain a SMSF.  So in the case of a fund which has two members which would qualify under s17A(1) on the death of one of the members it remains an SMSF for six months.  If the remaining member has not taken some steps during that period to bring the fund within the terms of s17A(2) then it will cease to be an SMSF.
•    In this case as a corporate trustee was appointed within six months it remained an SMSF (note that the Deed was signed a day before the six months expired).

The Court held that Mr Conti was 'entitled to ignore the direction in the Will'.

The children had also argued that the trustee had acted in bad faith in paying the benefits to Mr Conti; however the Court disagreed.  The Court found that there was no evidence of the trustee acting in bad faith as Mr Conti took advice before exercising trustee discretion and sought tax specialists advice on rights and obligations.

This case shows just how important non-lapsing Binding Death Benefit Nominations are and that it is critical for trustees to obtain specialist advice before exercising trustee discretion in the payment of superannuation death benefits.

Estate Planning is always urgent, so call Townsends Business & Corporate Lawyers on (02) 8296 6222 to arrange that crucial planning and avoid unwanted consequences.