SMSFs and estate planning: Ioppolo & Hesford v Conti

The recent Western Australian Supreme Court case of Ioppolo & Hesford v Conti^[1] highlights the special issues involved in estate planning where superannuation, and in particular an SMSF, is involved. In this case, a wife passed away with a Will in place which directed her superannuation to be paid to her children. Her Will specifically stated that she did not want any of her superannuation to be paid to her husband. However, on her death, her husband assumed control of the SMSF and caused her entire superannuation benefit to be paid to himself. The deceased's children failed to overturn the trustee's decision to pay the superannuation benefit to the husband.

Facts

Francesca and Augusto Conti were the only trustees and members of an SMSF known as the Conti Superannuation Fund (Fund).

In August 2010, Francesca passed away. She had a valid Will which purported to leave her superannuation benefit of approximately $648,586^[2] to her children. Francesca's Will specifically stated that she did not want any of her superannuation entitlement to be paid to her husband, Augusto.

Following Francesca's death, Augusto retired as trustee of the Fund and appointed a corporate trustee, which he controlled, as trustee of the SMSF (Trustee). Appointing a corporate trustee enabled the Fund to satisfy the requirements of a single-member SMSF under the Superannuation (Industry) Supervision Act 1993 (SIS Act).^[3] This meant that there was no need to appoint any other persons as trustees or members of the Fund.

At the time of her death, Francesca did not have a valid death benefit nomination in place. As a result, in accordance with the Fund's trust deed, the Trustee had broad discretion to pay Francesca's superannuation benefit to any spouse, child, or other person who in the Trustee's opinion was dependent on the member as at her date of death.

The Trustee exercised its discretion and determined to pay Francesca's entire superannuation entitlement to Augusto.

Issues in dispute and the court's findings

Francesca's children, in their capacity as executors of her estate, brought an action against Augusto and the Trustee in the Supreme Court of Western Australia.

It was common ground between the parties that the Trustee was entitled, but not bound, to take into account Francesca's desires as expressed in her Will as to the distribution of her superannuation benefit.

However, Francesca's children argued that, as executors of the estate, they were entitled to be appointed as co-trustees of the Fund. In that sense, the children would have had some power to influence the decision in relation to the payment of Francesca's superannuation benefit.

The court found that, while the SIS Act^[4] allows an executor to be appointed as a co-trustee of an SMSF, it does not require that such an appointment be made.

The executors also argued that, in ignoring the direction in Francesca's Will, the Trustee had not acted in 'a bona fide manner', as required by the Fund's trust deed. However, the Court rejected this argument, noting that Trustee was entitled to ignore the direction in the Will and that the mere fact of doing so could not of itself be evidence of a lack of bona fides.

Lessons to be learned

This case reminds us of the importance of proper estate planning: Francesca's failure to correctly document her wishes resulted in a substantial financial cost to her children, as well as a financially and emotionally costly family dispute.

Some key lessons from this case are set out below.

The interaction between Wills and SMSFs

Superannuation is not an 'estate asset': that is, it can only be dealt with in your Will if the superannuation trustee pays your death benefit to your estate. The trustee may be bound to do this, or may choose to do this. (You can read a previous ClearLaw article on the different types of estate assets and non-estate assets).

In the absence of such arrangements, superannuation generally cannot be disposed of under a Will. Accordingly, it can often be overlooked with significant financial and emotional costs to those who are left behind. In order to validly deal with your SMSF benefit on your death, you need to have in place an arrangement such as:

• a non-binding death benefit nomination;
• a binding death benefit nomination; or
• a death benefit agreement.

The important role of binding death benefits and death benefit agreements

A non-binding nomination, as the name suggests, will not bind the trustee of your SMSF. Accordingly, despite having a nomination in place, generally the trustee of your SMSF will nevertheless have a broad discretion as to whom your benefit should be paid. In this sense, a non-binding nomination may afford as little certainty for a member as having no nomination at all.

If you have a valid and binding death benefit nomination or a death benefit agreement in place, then on your death the trustee of your SMSF will be bound to pay your superannuation benefit to the persons you have specified, in such proportions as you have specified.

However, it is important to remember that, in Maddocks' view, a binding death benefit nomination will lapse after 3 years (there is some controversy about this point. You can read an article about why Maddocks believes the 3 year limit applies). Accordingly, you should ensure you review your binding death benefit nomination within 3 years of the date on which it is made in order to ensure it continues to bind the trustee of your SMSF.

A death benefit agreement on the other hand is binding and permanent until a member revokes or replaces it.

Does 'certainty' always provide the best result?

In Francesca's circumstances, where she clearly wanted her superannuation benefit paid to her children, a binding death-benefit nomination or a death benefit agreement would have been preferable, as it would have bound the Trustee and afforded her the certainty she required. Conversely, if Francesca simply had a non-binding nomination in place, the Trustee would nevertheless have been able to pay the benefit to Augusto.

However, binding a superannuation trustee may not always provide the best outcome: a person may inherently trust their loved ones to make use of flexibility, by seeking professional advice as to how benefits should be distributed on death. In this instance, a non-binding death benefit nomination may be preferable if you are comfortable that the trustee of your fund will act in the best interests of your dependants.

Ultimately, the arrangement that is best for you will depend on your personal circumstances. Regardless of the type of arrangement you have in place, you should review your arrangement any time your personal situation, or any of your dependants' personal situations, change in a way that affects how you would like your superannuation benefit to be distributed after you die.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Private Client Services or Superannuation teams.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of estate planning topics.

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