Legal case a lesson in proper SMSF admin and record keeping

“When he passed away, there were certain question marks about what to do with the fund,” explains Bryce Figot, special counsel with DBA Lawyers.

Binding death nomination

The company made a unilateral ex parte application to the court to answer a set of questions after the original pension documents could not be found and a binding death benefit nomination was not signed by the deceased but by his spouse, in her capacity holding an enduring power of attorney. The nomination indicated the fund’s assets should all go to the spouse.

Conflict of interest

“You can see where a conflict might arise,” notes Figot, explaining that under equity rules, trustees of an SMSF, who might also one day receive benefits from the fund, must not have a conflict of interest unless appropriately authorised.

Although the pension documents could not be found, there was circumstantial evidence indicating the pension reverted automatically to the second spouse and the court awarded in favour of her.

An additional question was whether the deceased left a valid, binding death benefit nomination and whether the holder of an enduring power of attorney can make a binding death benefit nomination. The court found this to be the case in those particular circumstances.

Figot notes while this case is instructive for SMSF members and trustees, it remains to be seen what may happen when these rules are tested again through courts based in jurisdictions other than Queensland.

Peter Hogan, the Self-Managed Super Fund Association’s (SMSFA’s) head of technical, notes the decision was centred around Queensland law given that was the state in which the case was heard.

Responsibility and validity

“This was the first time a case really dived into the trustee’s responsibilities in relation to a binding death benefit nomination and its validity,” he says.

Hogan also notes that although the spouse had enduring power of attorney, she did not change the terms and conditions of the binding nomination. “All the court did was to reaffirm what the member originally executed, even though the binding nomination only went for three years and had lapsed.”

The court also reaffirmed the member made the binding nomination when he had capacity, which is important.

“The decision indicates someone with an enduring power of attorney given to them around financial matters can extend that term, even though the person who originally executed the binding nomination has lost capacity. But it is equally importantly they can’t change that binding nomination, especially who it is deemed in favour of,” Hogan explains.

This is important, as one of the concerns people have around enduring powers of attorney is that the attorney may exchange a binding nomination for their own benefit.

“The court said this will not be valid, unless the enduring power of attorney expressly permits you to enter into what is called a conflict transaction in this particular case under Queensland law. This has to be allowed in the power of attorney and in the trust deed of the super fund as well,” he adds.

There are many other lessons for SMSF members and trustees from this case. The first is the importance of keeping the trust deed safe and up-to-date.

“Make sure all the fund’s documents are in order. Because it’s a lot cheaper to do this before someone dies or loses capacity. If Mr Giles had signed a binding death benefit nomination there may have been no need to go to court,” says Figot.

Family disputes

Greg Einfeld, a director of SMSF specialists Lime Actuarial, agrees there are many lessons from the Narumon case. “If mistakes are made in preparing and storing key documents, then the member’s wishes may not be granted on death and the person who receives the SMSF death benefit may not be the intended person. What’s more, this could result in family disputes.”

Einfeld says death benefit nominations should be prepared in accordance with the requirements of the trust deed and legislation. “For example, if the trust deed describes the required format of the binding nomination and the actual format is different to this, then the binding nomination may not be valid, and the member’s wishes won’t be taken into account.”

In addition, he says the wording of the trust deed should be consistent with the relevant legislation and regulations. “For example, if the trust deed makes reference to requirements of superannuation law, as the Narumon trust deed did, it is important that the law being referred to is actually relevant to SMSFs, which it was not in the Narumon case.”

Additionally, all documents, including pension documents, binding nominations and the trust deed, should be stored in a safe place where they can be accessed by the members and executors. If the documents aren’t available, then they may be deemed not to exist.

Interestingly, says Einfeld, in the Narumon case, as there were missing pension documents, the content of those documents was inferred from reports prepared by the fund’s actuary.

“In the absence of such actuarial reports, the pension would have been deemed not to be reversionary. This would have resulted in death benefits being paid to a different beneficiary.”

Hogan says the message is people need to go back to their trust deed and get advice around what their trust deed means, particularly around loss of capacity.

This case also indicates SMSF members should be very specific about the powers the enduring power of attorney has been given.

“People may also need to revisit the powers if it turns out they aren’t wide enough to achieve what it is they want to achieve,” he says.