Advisors Beware – “…a rose is in fact a specific flower…”
Shakespeare once wrote”… A rose is a rose by any other name…” This may be Shakespeare’s opinion but as far as Justice Mullin is concerned this is not necessarily the case.
His Honor presided over a Queensland Supreme Court case determined on the 25th of March last dealing specifically with binding death benefit nominations (“BDBNs”) in a Self Managed Superannuation Fund (“SMSF”).
Justice Mullin had to decide whether the term “Trustee of my Estate” meant one and the same thing as the “Legal Personal Representative” [Executor] of a deceased superannuant’s estate.
Munro v Munro is another installment of the necessity for SMSF Members to have a correctly drafted and executed BDBN to make sure their death benefits in fact end up where they want them to.
The facts – Munro v Munro  QSC 61
This is a situation of a “blended family”. Mr. Munro (“the deceased”) was a Solicitor during his working career. He obviously was not well versed with the Superannuation Laws. He relied on his Accountant and Financial Planner for advice, assistance and direction to the operation of his SMSF. The deceased was married to Patricia his second wife. Both the deceased and Patricia had children from their prior relationships.
The deceased has two daughters – Vanessa and Elke.
The deceased during his lifetime was a Member of the “Barry and Susie Super Fund” (“the Fund”) with Patricia. They were both individual Trustees of the Fund.
At the time of his death the deceased’s wealth of substance was in his SMSF. He had minimal personal assets. His Will appointed his daughters as his Executors. The deceased’s Will provided that from his estate, inclusive of the payment of his superannuation death benefits, there was a specific bequest to Patricia of $350,000. The residue of the estate was to be divided equally for the benefit of his daughters.
Approximately eighteen months before he died the deceased’s Accountants wrote to their client recommending a binding death benefit nomination be put in place by the deceased to “…guarantee that his wishes would be carried out upon his death…”
The deceased completed a death benefit nomination specifying that at the time of his death all of his superannuation death benefits would be paid to “… Trustee of deceased estate”. The Governing Rules of the Fund (“the Deed”) allegedly required the DBN to follow Regulation 6.22 of the Superannuation (Industry) Superannuation Act (“SIS”) Regulations which permitted the death benefit to be paid to a “Dependant or Legal Personal Representative” of a deceased Member of the Fund.
Additionally the form that was sent to the deceased by his Accountants to complete the death benefit nomination declared “… when you nominate your Executor you should enter Legal Personal Representative in the relation column….”
Following his death, Patricia appointed her daughter as a replacement Trustee of the Fund to make certain that the Fund maintained its complying status. The Trustees then notified the deceased’s daughters that the deceased’s death benefit nomination was defective. Thus in accordance with the Fund’s Deed, the Trustees were to distribute the death benefit at their discretion to Patricia.
The deceased’s daughters issued proceedings against Patricia claiming that the superannuation benefits should be paid to the estate. This would enable the deceased’s Will to allocate the death benefits in accordance with the deceased’s Will.
The Court took the view, agreeing with Patricia, that the BDBN was not a valid BDBN for the following reasons:
- The provisions of the SIS Act which set out the form of a binding death benefit nomination in Section 59 do not apply to SMSFs.
- Reference to “Trustee of deceased estate” on the BDBN form was not correct. The Deed purported to follow Regulation 6.22 of the SIS Act regulations which permitted the death benefit to be paid to a “Dependant or Legal Personal Representative”. “Legal Personal Representative” means Executor of the Will of a deceased person.
- Although the term “Executor” and “Trustee” to a layman are “one and the same”, their roles are different. Someone appointed Executor of an estate who manages the assets post death may become the Trustee of the estate of a deceased to distribute them in accordance with the provisions of a Will;
- The court determined that whilst the deceased may have required his superannuation death benefits to be paid to his Executors, it was difficult to reach that conclusion. The BDBN form enabled the option of specifying “…the legal personal representative…” to be the death benefit recipient. Expressly, it stated “… when you nominate your Executor you should enter Legal Personal Representative in the relation column…” The deceased didn’t do this.
- The deceased may have intended his superannuation death benefits to end up in his estate after being paid to his Executors. The Court took the view that it was hard to reach that conclusion as the BDBN form provided the specific option to nominate a Legal Personal Representative. The BDBN form also directed exactly how to complete the form. Specifically, the BDBN form stated “when you nominate your Executor you should enter Legal Personal Representative in the relation column”;
- A BDBN should be strictly interpreted as drafted and executed in accordance with the terms of the applicable Fund’s Trust Deed. Reference to a DBN in a Will is totally irrelevant.
Justice Mullin thus determined that “Trustee of my Estate” did not mean one in the same thing as the “Legal Personal Representative”. As a result, the deceased’s BDBN failed.
The case also highlights Accountants, Financial Planners and Lawyers who are not conversant with superannuation should not assist clients drafting and executing DBNs of any description.
The determination of his Honor, Justice Mullin, in the case is unfavorable to the deceased’s daughters. An appeal is probably pending. But what if an appeal were to be dismissed? One would expect legal proceedings by the aggrieved children of the deceased against both his Financial Planner and Accountants would occur.
The question to be answered is “…did the deceased’s Financial Planner and Accountants fail in their duty of care to guarantee that the BDBN recommended to their client was in fact made binding. Did the Accountants and/or Financial Planner review the completed BDBN? Did they obtain any legal advice as to the correct requirements of the BDBN in accordance with the Deed?
This case is not the first where the Court has determined taking a very stringent view as to the form and content of a BDBN and its adherence to the provisions of the Governing Rules of the Fund. The decision of Donovan v Donovan highlighted the necessity to draft and execute BDBNs in accordance with the Fund’s Deed.
Disputes in blended families where ineffective death benefit BDBNs occur will be a growth industry in the SMSF sector. This shall be particularly the case where the SMSF Members are also Trustees.
With each and every SMSF the construction, configuration and requirements of DBNs must strictly meet the provisions of the applicable Deed. Remember not all SMSF Trust Deeds are identical and BDBN requirements vary accordingly.
Munro v Munro sounds the “warning bells” to both Accountants and Financial Planners who err when assisting clients to prepare death benefit nominations for SMSFs. Clients must be made well aware that BDBNs are not something to ignore, be tinkered with or are insignificant. The Courts now are strictly interpreting construction, configuration and requirements of a BDBN when examined and compared to the provisions of the SMSF Trust Deed (Governing Rules) requirements. If Advisers are not sure of the manner and requirements in which a BDBN format is to be constructed and configured, obtain the appropriate legal advice from a Lawyer well versed in the jurisdiction.
Ian W Glenister, Juris. LLB, Solicitor