The payment of death benefits within superannuation can represent a legal and regulatory minefield for fund trustees. Stephen Graham outlines how to avoid the pitfalls.
The sole purpose test requires a superannuation fund to pay death benefits to the member’s legal personal representative, to any or all of the member’s dependants, or to both.
Therefore, unless otherwise set out in the trust deed, the trustee has discretion and must decide how best to distribute a deceased member’s death benefit between the legal personal representative (LPR) and dependants.
The decision must also be made in accordance with the trustee’s duties to give due and genuine consideration and to exercise reasonable care. This often requires the trustee to weigh-up the merits of competing claims.
There is now a debate over whether this discretion should be removed by legislation given the fiduciary commitment that it requires from trustees. There is a view that trustees should pay death benefits to the deceased member’s LPR in all cases.
In its Phase 2 Issues Paper, the Cooper Review raised the question of whether "it would be useful to mandate that, in the absence of a binding death benefit nomination, any death benefit would simply be paid to the deceased member’s estate?".
Similarly, at the 2008 Association of Superannuation Funds of Australia conference, Michael Rice of Rice Warner Actuaries and Tower Australia’s managing director, Jim Minto, were part of a roundtable discussion on the topic of ‘should death, disability insurance and super be bed mates?’.
The discussion was wide-ranging and included a view that trustees could become bogged-down in claims and that death benefits might not always be paid in accordance with the wishes of the deceased. Some participants in the discussion clearly agreed with the intent of the question posed by the Cooper Review.
There are a number of arguments in favour of removing the trustee’s discretion in death benefit payments. These include:
providing certainty to members about who will receive their death benefit;
extricating the trustee from the claim-staking process and allowing the courts to deal with disputes under the family provision legislation; and
accelerating the payment of death benefits because no discretionary decision is needed.
At face value, these arguments are self-evident to benefit members. However, problems can arise when a death benefit is paid to the deceased member’s LPR, which means no changes should be made to the existing arrangements.
Creditors get the first bite of the cherry
In the wake of a death, the first requirement of a LPR is to discharge the deceased member’s debts and liabilities.
Only then can distributions to beneficiaries be made. An LPR who distributes estate assets without paying known debts is in breach of the duty to pay debts and becomes personally liable for the loss suffered by the deceased member’s creditors. He/she cannot seek a refund from the beneficiaries.
Superannuation death benefits are not protected like payments from life insurance policies and are available to creditors.
What happens if the member does not have a will?
Given the general distrust of politicians in Australia, it is amazing that 42 per cent of us allow them to decide who receives our estate when we die. For these Australians, the way their estate is distributed is set out in legislation.
However, following this course of action can lead to an unintended outcome due to the nature of this one-size-fits all legislation. For example:
a deceased member is survived by their de facto partner of many years and a son from a previous marriage that ends in divorce;
the son lives overseas and is estranged from the member;
the member has indicated to his de facto partner that he intends to make a will under which she will receive his entire estate, apart from a small legacy of $10,000 to assist his son;
the member (who lives in New South Wales) dies before he gets the chance to make this will;
the member’s death benefit is $1 million; and
the only other assets in the estate are personal effects worth $10,000 and investments worth $40,000.
Under New South Wales legislation, the de facto spouse would be entitled to the personal effects, a statutory legacy of $393,924 and one half of the remainder of the estate, which would amount to $323,028.
Rather than receiving a small legacy of $10,000 as intended by the deceased, the estranged son would receive a distribution of $323,028 from the member’s estate.
In many cases the will is invalid anyway
As the Law Society of New South Wales notes on its website: "There have been very many cases where homemade wills were either unclear, not properly drawn up or caused an unwanted tax liability.
"Many of these cases end up in court and carry on for years, causing distress and perhaps hardship to the family of the deceased."
Costs may also be borne by the estate.
Where the court cannot rectify the will, an administrator will be appointed to deal with the estate under the law of intestacy, which can lead to the problems discussed above.
The risk of dealing with ‘intermeddlers’
In many cases, the size and nature of the assets in an estate means that it is not economic to obtain a grant of representation (ie, probate or letters of administration).
This means that there is no LPR to pay the death benefit to and the trustee is forced to deal with an executor de son tort (otherwise known as an intermeddler).
It is important to note that there is no requirement in superannuation law for a trustee to request a grant of representation before paying an LPR like there is in the life insurance law.
In fact, the definition of the term ‘personal representative’ in the Superannuation Industry (Supervision) Act 1993 (SIS Act) does not require a grant of probate because it refers to the executor of the will of a deceased person.
Where the trustee pays a death benefit to an intermeddler, there is a risk that it may have to pay the death benefit again, without the ability of recovering the original payment from the intermeddler, where the intermeddler:
does not account to the creditors and beneficiaries of the deceased member;
no longer has estate assets for distribution; and
it can be argued that in paying the intermeddler, the trustee did not act diligently, or acted unfairly or unreasonably.
Family provision claims may change things
Where a deceased member has not adequately provided for the proper maintenance, education or advancement in life of an eligible person in their will, the court may in its discretion do so under state family provision legislation.
This means that while a deceased member makes a will and the trustee pays the death benefit to his/her LPR, there is no guarantee that the death benefit will be distributed in accordance with the member’s wishes.
Again, where a will is challenged, legal costs are borne by the estate, reducing the final amount payable to beneficiaries.
Binding nominations are not a panacea
Unfortunately, in many cases what may appear to a member to be a binding death benefit nomination will not actually bind the trustee, which means that the trustee still has discretion. These cases include where:
the nomination is more than three years old and has not been confirmed or replaced;
a non-dependant (such as a non financially dependent parent or sibling) has been nominated;
the nomination has not been correctly witnessed; and/or
the portion of the death benefit to be paid to each nominee is not readily ascertainable.
Another difficulty with so called ‘binding nominations’ is that the underlying death benefit may form part of the notional estate of a deceased member under the family provision legislation because the nomination would lead to the deceased member’s property being held by another person for no consideration.
Accordingly, although the deceased member may have taken active steps to ensure that his/her death benefit is not part of the estate, the court can deem it to be part of the estate and adjust the entitlements of all beneficiaries under the member’s will to take the death benefit into account.
It is possible that the binding nomination provisions in the SIS Act may cover the field and therefore override state family provision legislation to the extent of any inconsistency. However, this has not been tested and the ‘cover the field’ argument is notoriously difficult to apply in practice.
The value of properly considered trustee decision making
The current discretion in death benefit payments provides trustees with the flexibility needed to prevent these problems from occurring. It also ensures that the most appropriate outcome is achieved through a duly considered claim-staking process.
Procedural fairness is also provided through the trustee’s internal dispute resolution procedure and the ability to make a complaint about the trustee’s decision with the Superannuation Complaints Tribunal (SCT).
This process has significant advantages over the process for obtaining a family provision order because it is cheaper and not adversarial in nature.
The importance of the SCT
The SCT is required to enquire into and resolve complaints in a fair, economical, informal and quick manner.
When coupled with the advantages of properly considered trustee decision making on death benefits, the SCT process means that claimants can have an independent government body quickly and cheaply (when compared to a court) review the trustee’s decision to ensure that it is fair and reasonable.
The court process takes much longer and leads to significant costs for the estate, which reduces the final amount payable to the beneficiaries.
The payment of death benefits by the trustee conveys valuable estate planning benefits to the member and their dependents, which takes account of personal circumstances and complexities. This is one of the main unseen benefits of superannuation and avoids benefits being potentially consumed via the legal system. SR
Stephen Graham is trustee advocate at Tower Australia.