The control of a death benefit payment from a self-managed super fund on the death of a member is critical. To paraphrase Paul Keating, if you’re not in charge of the death benefit payment, you’re camping out. It’s a much neglected area of estate planning.
The potential for things to go wrong in this area are well illustrated in the reported cases.
Case study: Katz v. Grossman
For example, in the case of Katz v. Grossman the member, Ervin Katz, died leaving his daughter Linda as the surviving individual trustee of the fund (the ‘E. Katz Employees Trust Fund’). Prior to his death Mr. Grossman had made a non-binding death benefit nomination requesting that his benefit in the fund be divided equally between Linda and his son, Daniel. Linda, as surviving trustee appointed her husband as a replacement trustee. The trustees then resolved to pay 100% of Mr. Grossman’s death benefit to Linda. The court rejected Daniel’s challenge to the validity of the trustees’ appointment and Linda presumably took the lot.
Ensuring a smooth transfer of SMSF ownership on the death of the member
But what should be done to effect a smooth transfer in accordance with the wishes of the deceased member?
Firstly, as a practical suggestion, it would be wise for any adviser to check who has effective control of the fund chequebook, internet banking passwords or the like. Suitable controls need to be in place before the member passes away to prevent the transfer and dissipation of death benefits without a legal shot having been fired.
Once this threshold issue is dealt with, consideration should then be given to the person the client wishes to appoint as their legal personal representative (i.e. the executor of their will).
This is important because this individual will be expected to be appointed as a co-trustee with any existing trustee and involve themselves in administering the deceased’s death benefit. The executor’s work might involve considering the terms of a death benefit nomination or the like. It might also require the exercise of trustee discretion in paying a death benefit to a potential range of beneficiaries.
Another issue of considerable significance is the trust deed provisions dealing with the appointment of trustees. This is important since the objective is to have the client’s executor appointed as a trustee (or a director of a trustee company if there’s a corporate trustee).
Different trust deeds offer different mechanisms for the appointment of trustees. A common method is to use a trust deed provision which appoints a new trustee by a majority of fund members. Such a clause is problematic when trying to appoint the client’s executor as trustee, since this would require the consent of the surviving member, an individual who may have a different perspective on the payment of the deceased’s death benefit to the executor. Other solutions would be required.
In summary, the trust deed of the fund will need to be carefully considered to ensure a smooth transition. Amendments may well be needed.
Where there is a corporate trustee, further issues may arise. In order to ensure that the deceased member’s executor is appointed as a director of the trustee company, the company’s constitution will need to be considered as well as the trust deed.
Many company constitutions require that a director be appointed by a majority of members at a general meeting. Where there were two directors, one of whom is now deceased, it may not in fact be possible to appoint a new trustee. Again, amendments to the company constitution may be necessary as part of the client’s estate planning.
Control of any shares in the trustee company owned by the deceased will also need to be dealt with. This will usually occur via the Will. If the deceased member does not hold shares in the corporate trustee (and this is possible, since this is not a requirement under the SIS Act) it may be necessary to modify the constitution of the trustee company to allow the member’s executor to appoint themselves as a director.
The importance of ensuring that the correct person has control of the fund following the member’s death to effect the ‘correct’ payment of the death benefit cannot be overstated.