If you die, your current spouse (even if you have separated) is a potential beneficiary. Paul Jones
For many people, superannuation is a substantial portion of the legacy they can leave to dependents and other beneficiaries. This is especially the case if insurance is held through the super fund.
As super is not typically an asset dealt with by your will, it is important to understand the rules for payment of death benefits and set up strategies to maximise the chance that your assets will be passed to the right people in the most effective way upon your death.
Of the 2138 written complaints received by the Superannuation Complaints Tribunal (SCT) in the 2016-17 financial year, 409 (roughly 19 per cent) related to disputes over death benefits.
Disputes over the payment of death benefits from self-managed super funds (SMSFs) cannot be referred to the SCT, so disputes may result in long and expensive legal actions through the courts. It is therefore important for all SMSF members to consider the estate planning implications and have a sound plan in place.
You can never solve all the potential estate planning problems and conflicts but thinking through your situation carefully may help to minimise the potential for a dispute.
If you are a member of an SMSF, this means not only deciding who you wish to receive death benefits but also who will be left in control of the decisions and what documentation is needed to ensure your wishes are carried out.
Planning and advice may help to prevent families from being ripped apart.
These are the four key planning errors.
1. Thinking everything is OK because family is in control
Lawyers often say that few deceased estates are settled without some family dispute.
In retail, industry and corporate super funds, the decisions and payment of death benefits are made by independent trustees. Disputes may arise over the decisions these trustees make, but at least the trustees don't have a vested interest when making decisions. You can't say the same for family members.
There are many court cases (such as Katz v Grossman) which deal with family disputes over who is entitled to be paid the death benefit.
Think carefully before allowing another person to become a member of your fund as this person may be able to assume control of the fund's administration, including death benefit decisions. Making a binding death benefit nomination may minimise the trustee discretion and avoid outcomes you do not choose.
2. Incorrect documentation of a binding death benefit nomination
Putting in place a binding death benefit nomination may avoid arguments over who should receive a death benefit, but only if it is a valid and correctly executed document.
Super rules specify the requirements for making a valid nomination. This includes the need to be in writing, two appropriate witnesses and that it's renewed every three years unless non-lapsing in trust deed rules.
However, in SMSF Determination SMSFD 2008/3, the ATO's view is that the normal rules do not apply to an SMSF.
The rules that determine what is a valid nomination and the form it must take are instead contained in your fund's trust deed.
An important case is Donovan v Donovan in the Queensland Supreme Court. The member made a simple, unwitnessed written request specifying who would receive death benefits and believed it to be binding.
However, the court found that the trust deed specified that binding nominations needed to be in a form required to satisfy the statutory requirements. As such, the nomination was ruled to be invalid. The rules that apply to retail funds applied to this fund.
If planning to make a binding nomination, carefully follow the rules specified in your trust deed to ensure the nomination is valid.
3. Not understanding who can make a claim or receive a death benefit
Death benefits can only be paid to a beneficiary under super law. These include the current spouse (legal or de facto), a child (including step-child), a financial dependant, a person in an interdependency relationship or the estate.
In split families, this may cause significant problems and the scope of potential beneficiaries may be wider than you assumed. A suggestion is to draw a family tree and check the connections to identify all potential
Where potential conflicts are identified, a binding death benefit nomination may be a solution. But note the nomination will not be valid if you nominate someone who does not meet the super definition of dependent.
4. Failing to finalise a divorce after marriage breakdown
If you die, your current spouse is a potential beneficiary. This includes anyone you are still legally married to, even if you are separated.
If you have not dissolved the marriage through a legal divorce, your ex-spouse may still have a claim on your super death benefit. A divorced ex-spouse can only make a claim if they are still financially dependent upon you, for example if you are paying spousal maintenance.
If you were in a de-facto relationship, your ex-partner stops being a "spouse" for super purposes when you separate and cease living together on a permanent basis.
By Louise Biti
2 May 2018
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