Munro v Munro: the importance of a valid binding death benefit nomination

Death benefit nominations are one important tool by which SMSF members may determine who will receive their superannuation benefits on their death — but will only be effective if they comply with superannuation law and the SMSF's trust deed.

The recent Supreme Court of Queensland case of Munro v Munro^[1] is a reminder of the need to take care when nominating who is to receive a member's superannuation benefits — particularly around payments to a member's estate — to ensure they bind the fund's trustee.

The case also touched on the issue of whether binding death benefit nominations can last indefinitely.

This article summarises the case, and what it means for SMSFs.

Overview

The case concerned a dispute between the SMSF trustees and 2 of the members' executors about a binding death benefit nomination by a deceased SMSF member.

The trustees refused to give effect to the nomination as they believed it was not binding on them. The two executors sought a declaration from the court that the nomination was binding on the trustees.

The primary issue was the language used in the binding death benefit nomination around a deceased estate — and whether this complied with superannuation law and the SMSF's trust deed.

The court held that the death benefit nomination was not a binding nomination as was required by superannuation law and the SMSF's trust deed — and so the trustees were not bound by it.

Death benefit nominations

A death benefit nomination is a notice given by an SMSF member to the trustee of the fund setting out who is to receive the member's superannuation benefits on their death. The member can choose if their nomination is binding or non-binding.

If the death benefit nomination is binding and complies with superannuation law and the SMSF's trust deed, then the trustee is bound by it and must distribute the member's superannuation benefits in accordance with its terms.

If there is no binding death benefit nomination or agreement in place, then the trustee generally has discretion to decide how to distribute the benefits (in a way that is allowed under superannuation law and the SMSF's trust deed) — potentially even to themselves.

This is important as a binding death benefit nomination is sometimes used in situations where the member thinks that the other trustees (or directors of the corporate trustee) might distribute the benefit in a manner that is not consistent with their wishes.

The facts of the case

The death benefit nomination

Mr Munro signed a binding death benefit nomination in September 2009 specifying the beneficiary to receive his superannuation benefits as:

The fund

Mr Munro, a solicitor, was the trustee and member of an SMSF with his wife (Mrs Munro).

Mr Munro died in August 2011.

The executors of Mr Munro's will were Mr Munro's two daughters from a previous marriage and Mrs Munro.

After Mr Munro's death, Mrs Munro's daughter (who was not related to Mr Munro) was appointed as an additional trustee of the SMSF.

The trust deed

The SMSF's trust deed required the trustee to pay any benefits in accordance with a binding nomination provided that the nomination, amongst other things:

• specified that the benefits were to be paid to (as nominated by the member):
  • one or more of the member's 'dependants'; or
  • the member's 'legal personal representative',
  which reflects the requirements of superannuation law;^[2] and
• complied with any requirements which the trustee must comply with to avoid a contravention of the requirements or in order for the SMSF to qualify for concessional taxation treatment as a complying superannuation fund.

The SMSF's trust deed provided that if these requirements were not satisfied, then the trustees were not bound by the nomination and could pay the benefits at their discretion (subject to the trust deed and superannuation law, which limited payment of the benefits to 'dependants' or the 'legal personal representative' as above).

The dispute

The trustees (being Mrs Munro and her daughter) gave notice to the two executors (being Mr Munro's two daughters) that they intended to exercise their discretion as trustees in paying Mr Munro's superannuation benefits, on the basis that they considered the death benefit nomination invalid for the purposes of the trust deed.

Mr Munro's daughters (two of the three executors of his will) sought a court order that the nomination was binding on the trustees.

The outcome

The court held that the death benefit nomination was not a binding nomination as was required by superannuation law and the SMSF's trust deed — and so the trustees were not bound by it.

The issue with the nomination was that the nominated beneficiary of 'Trustee of Deceased Estate' did not comply with superannuation law and the trust deed — which required payments to 'dependants' or a 'legal personal representative'.

The definition of 'legal personal representative' in superannuation law means, relevantly in this situation, the executor of the will of a deceased person.

Mr Munro's daughters argued that 'Trustee of Deceased Estate' meant Mr Munro's executors.

The judge noted that while the terms 'executor' and 'trustee' may be used interchangeably colloquially, the terms are distinct. This is generally an issue of timing. The 'executor' holds the property of a deceased person for the purpose of carrying out the administration duties of the estate (for example, collecting the assets, paying the debts of the deceased and administration expenses, and selling the assets to give effects to the gifts in the will). The 'trustee' then applies the assets to the trusts under the will.

As a result, the nomination of 'Trustee of Deceased Estate' was insufficient to direct the trustee to pay the benefits to Mr Munro's 'legal personal representative', being his executors. As a result, the nomination was not binding.

Who should have been nominated as the beneficiary?

It appears that Mr Munro's intention was that his superannuation benefits be paid to his estate.

If Mr Munro intended to nominate his 'legal personal representative' (that is, his executors), then his binding death benefit nomination should have specified either:

• that it was nominating the 'legal personal representative' (this is preferable) or the executor of the will; or
• the name of the executor of the will (if that coincided with the executor named in the last will), but identified that the named person was the legal personal representative.

In our view 'legal personal representative' is preferable because this reflects the wording in the superannuation law.^[3]

What does the case mean for SMSFs?

Members will need to check any death benefit nominations they have entered into to ensure that that the nomination will in fact bind the trustee.

This is particularly important for members who intend their superannuation benefits to be paid to their estate. If a member has signed a death benefit nomination specifying payments to a 'trustee', this may be ineffective and the SMSF trustees may not be bound by it.

Members should be mindful of situations such as Munro v Munro, where the remaining trustees (or directors of the trustee) wish to distribute the benefits otherwise than in accordance with the nomination — and may look for reasons not to be bound by the nomination.

If members are unsure about their death benefit nominations, they should obtain legal advice.

Cleardocs death benefit nominations

When ordering a Cleardocs Death Benefit Nomination, you are given the option of electing for the member's benefits to be distributed to:

• the member's legal personal representative (that is, the executor/administrator of their estate) - who will be listed as the 'legal personal representative'; and/or
• one or more of the member's dependants — who will be listed by name.

Customers should always choose 'legal personal representative' as the intended beneficiary if the member wishes their benefits to go to their estate.

The court's comments regarding indefinite binding death benefit nominations

The general practice is that a binding death benefit nomination lapses after 3 years. There is some controversy on this point, which you can read more in our earlier ClearLaw article titled "Binding death benefit nominations — Caution required on non-lapsing nominations".

As set out in this article, the issue relates to whether or not a superannuation regulation applies to SMSFs — which is unclear given inconsistent provisions of superannuation law. Given this uncertainty, the sensible position to adopt (as is done by Cleardocs) is that the 3-year limit applies.

While the Munro v Munro case did not deal with the question or whether the 3-year limit applies, the court did express a view the relevant superannuation regulation (and, as a result, the 3-year limitation) did not apply to Mr Munro's SMSF.

Importantly, however, this was based on a view that the relevant regulation does not, by reason of superannuation law, apply to SMSFs — but it may apply, if the SMSF's trust deed provides for this.

As a result, the court's comments in this case related to Mr Munro's SMSF and did not go so far as to support this conclusion for all SMSFs. Further, given the case was not a question of whether or not a binding death benefit nomination is effective after 3 years — and was a decision of a single judge of the Supreme Court of Queensland (not yet approved by a higher court) — we do not consider that the Munro v Munro case yet justifies a departure from the standard practice of applying the 3-year limit to binding death benefit nominations.

We therefore recommend SMSF members continue to ensure binding death benefit nominations are renewed every 3 years.

Customers who wish to have a permanent arrangement for the payment of their death benefits can enter into a Death Benefit Agreement — which is permanent and remains until the member revokes or replaces it.

More information on this case

The full decision is available here.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the superannuation team.

Order Cleardocs death benefit packages

• Death Benefit Nomination
• Death Benefit Agreement