Posted by: Richard Thompson, Litigation lawyer explains with a peculiar case study...
The primary lesson learnt from the Supreme Court of
Queensland's judgment of Munro v. Munro
is that one must apply legal considerations in determining whether a particular
BDBN is validly completed in accordance with the terms of the Deed.
But what happens if the Deed itself contemplates a BDBN but
precludes the Trustee from being bound by such document?
In the following case study, we show how important it is to
consider the legal ramifications of the terms of an SMSF Deed well before
executing a BDBN.
CASE STUDY
"Mr & Mrs Brown (second marriage) engaged a top tier law firm
to draft and execute a Deed of Variation to the Self Managed Superannuation
Fund Deed.
Mrs Brown, who is receiving a pension from the Fund, validly enters
into a BDBN nominating her children as the beneficiaries.
Mrs Brown passes away, leaving Mr Brown as the sole Trustee and in
charge of distributing Mrs Brown's superannuation account. Is Mr Brown required to pay the benefit to
Mrs Brown's children?
The Deed of Variation allowed, via Rule 6.4 of the Deed, for a Binding
Death Nomination form to be executed and provides, within the deed, the
prescriptive form that the Nomination must take. Mrs
Brown, as stated above, had complied with such requirements.
However, Sub- Rule 6.4(e) directs that where a member dies whilst in receipt of a pension, the
benefit payable on that member's death will be governed by the appendix to the
Trust Deed (not rule 6.4). Therefore the
provisions of the appendix will overide a Binding Death Benefit Nomination
prepared in accordance with Rule 6.4 where the relevant member is receiving a
pension from the Fund.
The Appendix provides that the Trustee "may" pay a lump sum to a person identified in accordance
with Rule 6.4 or pay a reversionary pension to any one or more of the
dependants of the deceased member in accordance with the relevant clause.
Accordingly, when read in conjunction
with Sub-rule 6.4(e), Mr Brown retained a discretion on the death of Mrs Brown
as a pension recipient that could override the Binding Death Benefit Nomination
prepared by Mrs Brown in accordance with Rule 6.4 of the trust deed.
Therefore, legally, Mr Brown could use
his discretion and not pay Mrs Brown's benefit to her children and decide to
pay it to Mrs Brown's dependants, which would include himself.
Whilst the Nomination Form was completed in accordance with
the Deed (unlike in Munro), the issue
lies in the enforceability of the Nomination, which was obviously not the
client's intention when engaging the firm to prepare the Deed.
Left unchanged, this could have had significant adverse
consequences for the deceased's children had the nomination not be enforced by
the Trustee.
Fortunately, Mr and Mrs Brown attended Anderssen Lawyers, we
reviewed the deed, recognised the issue and had the clients sign a further Deed
of Amendment to ensure that the nomination will at all times in the future be
binding on the Trustee, subject to it being deemed a valid Nomination as is the
usual course.
Our view of this provision, when read in conjunction with Sub-rule 6.4(e), is that the Trustee retains a discretion on the death of a pension recipient that could override any Binding Death Benefit Nomination prepared in accordance with Rule 6.4 of the trust deed, even if a BDBN could be validly prepared in accordance with the requirements of that Rule.
Our view of this provision, when read in conjunction with Sub-rule 6.4(e), is that the Trustee retains a discretion on the death of a pension recipient that could override any Binding Death Benefit Nomination prepared in accordance with Rule 6.4 of the trust deed, even if a BDBN could be validly prepared in accordance with the requirements of that Rule.
To avoid such an issue for yourself or your clients, contact
our Succession / Superannuation Team to allow us to review your Deed or
Nomination and provide our position as to whether amendments are required – all
free of charge.
If you have any dispute in relation to a Deed or Nomination,
contact our Litigation team for a free, no obligation chat about your
situation.
Richard Thompson is an experienced solicitor in the area of
Trust Deed disputes and forms part of the Litigation team and Succession/Superannuation
team of Anderssen Lawyers.
Richard Thompson,
together with team leader Kylie Wilson, will be presenting a seminar this
Thursday afternoon entitled "Should
you be drafting SMSF Binding Death Nominations?". There are limited spaces available – to
register for this event please click here.
