Death & Super: No, your estate documents do not determine what happens

Superannuation savings are the primary, and often only, income source for many Australians upon retirement. With an ageing population, it is important to remember to turn your mind to what happens to your retirement savings when you pass away. This article focuses on how the different SMSF documents interact when a member passes away and how to ensure death benefits are passed on in accordance with your wishes Melissa Ramov, Maddocks Lawyers

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Which documents govern your SMSF?

There are a number of documents which govern your SMSF and more specifically, your death benefits. These documents may consist of:

• The SMSF Trust Deed (Deed);
• Death Benefit Agreement (DBA);
• Binding (or Non-binding) Death Benefit Nomination (BDBN);
• Pension Payment Agreement (PPA);
• Pension letters between the members and trustee; and
• Minutes of trustee meetings relating to pensions.

What about the will?

A will does not govern superannuation benefits and generally these benefits do not form part of a member’s estate upon death.

The only circumstances where superannuation benefits form part of a member’s estate is where the member has required the trustee (in the member’s DBA or BDBN), or the Deed requires that the trustee, pay the relevant superannuation “death benefits” to the “legal personal representative” of the member upon the member’s death.

Also, the trustee may have a discretion as to how to pay death benefits: in these circumstances it is open to the trustee to pay the death benefits to the member’s “legal personal representative”.

What are the different types of death benefits?

There are:

• Pensions paid under a PPA or a set of pension documents (letters and minutes)
• Amounts sitting in an accumulation account

When paid as a death benefit, these benefits can be paid as a:

• reversionary pension
• a new pension
• a lump-sum
• a combination of the above

Do these documents talk to one another?

When it comes to the distribution of death benefits upon a member’s death, there can be uncertainties which arise if the documents governing your super do not work well together. The Cleardocs documents have been drafted to account for these issues, some of which are set out below.

Priority and inconsistency

Where a member has more than one type of document which deals with their death benefits, then the SMSF trust deed should specify which documents take priority and in the event of an inconsistency, which document will prevail. Examples of issues which may arise are as follows:

• If a pension is paid under a PPA, and the PPA specifies a reversionary beneficiary who is eligible to continue to receive the member’s pension (such as a spouse), and the trustee has no discretion about whether the pension reverts in that way, then the PPA is the only relevant document. This is important to note, particularly when members are reviewing death benefit arrangements following a divorce or their spouses’ death – the PPA should often be amended as well as the DBA updated.
• If a PPA or pension documents under which a pension is paid, say nothing about how the pension will be paid on the member’s death – then in the case of customers with a Cleardocs deed, you would need to look to a DBA, BDBN, non-binding death benefit nomination, and then the Deed in that order of priority.
• If a PPA and BDBN are inconsistent, then you would look to the terms of the Deed to determine which document would prevail. In the case of a Cleardocs deed, if the PPA specifies that it prevails over all other documents – then there is no need to look at the BDBN.
• In the case of distributing accumulation amounts, customers with a Cleardocs deed would need to look to a DBA, BDBN, non-biding death benefit nomination, and then the Deed in that order of priority.

Invalidity

Invalidity issue	This is what you do
Invalid direction: Where there is a direction in one of a member’s governing documents which is rendered invalid by super law – that is, it directs a benefit be paid to a person to whom those benefits cannot be paid in accordance with the law	The Deed should deal with this contingency and specify how these benefits are to be distributed.
Improperly signed: Where the documents are improperly signed, (i.e. in the case of a BDBN it is not witnessed by two individuals)	Look to the Deed to determine which other documents would govern the distribution of death benefits, and in what order, and determine which of those documents the member has in place.
Incorrect wording: If the intention of the documents is to distribute the member’s death benefits to the member’s “legal personal representative”, but the document uses words other than “legal personal representative” e.g. “executors and estate”, “Trustee of Deceased Estate” – then this renders the document invalid. The law requires, and case law has confirmed[1], that the document must refer to a “legal personal representative” and not anything else.[2]	Look to the Deed to determine which other documents would govern the distribution of death benefits, and in what order, and determine which of those documents the member has in place.
Beneficiary predeceases member: If a nominated beneficiary predeceases the member, then if the document itself does not deal with this contingency – it is rendered invalid.	Look to the terms of the Deed to determine which other documents would govern the distribution of death benefits, and in what order, and determine which of those documents the member has in place.

Where a BDBN has expired and it records the last wishes of the member, in respect of death benefits – it may not be the case that the SMSF’s trustee has no direction as to how to distribute the deceased’s benefits. The Queensland Supreme Court has confirmed that, at least in that jurisdiction, an attorney (appointed under an enduring power of attorney) has the power to make, renew or extend a BDBN on behalf of a member while the member was still alive but incapacitated.^[3]

More information on this case can be found here.

Remaining benefits

If after the death of a member, not all the benefits have been paid or applied under the death benefit agreement or BDBN, then the SMSF trust deed should set out how these remaining benefits should be distributed. Generally, the trustee will retain the ultimate discretion as to how to pay the death benefits.

What next?

You should ensure that each document which governs your super talks to the other. If they do not – you should consider updating your documents.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

• Housing affordability and super: upcoming changes for first home buyers and 'downsizers'
• The reality of ageing SMSF trustees: death of an SMSF trustee
• What does it take to be removed as a SMSF trustee? Views from the NSW Supreme Court
• Corporate Trustee v Individual Trustee: Key Differences for SMSFs

Order related document packages

• Superannuation Trust (SMSF)
• Update to SMSF
• SMSF set up + register Corporate Trustee
• SMSF Investment Strategy
• Change SMSF Trustee (Cleardocs deed)
• Change SMSF Trustee (death of a trustee)

[1] Munro & Anor v Munro & Anor [2015] QSC 61.

[2] Sections 55A(1) and 31 of the Superannuation Industry (Supervision) Act 1993 (Cth) and regulation 6.22 of the Superannuation Industry (Supervision) Regulations 1994 (Cth).

[3] Re Narumon [2018] QSC 185.