Submission - Inquiry Into Superannuation and Standards of Living in Retirement

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Appendix A

Superannuation Death Benefits and Estate Planning - a legal perspective

The Senate Select Committee on Superannuation has asked for a submission of the law relating to superannuation death benefits and the impediments that exist in the administration of death benefits. This submission will address the issues that arise for both heterosexual single and married persons and gay and lesbian members and concentrates for convenience on Federal and NSW law. It will address the following:

• The importance of understanding the legal issues surrounding superannuation death benefits;

• The legal issues in relation to estate planning upon divorce and remarriage - the challenge for combined families;

• Legal issues affecting gay and lesbian couples;

• The controversial Property (Relationships) Act 1984 (NSW) as amended at 13 July 1999.

It should be noted that this area of the law is something of a minefield and that much confusion still exists in both the community and amongst many lawyers and accountants alike about the law regulating the payment of death benefits from a person’s interest in a superannuation fund. The most common misconception is that a superannuation death benefit automatically forms part of a deceased’s estate.

The Trust Deed

As the committee will know, the governing rules of a superannuation fund are found in the trust deed. The trustee is bound by these rules and by the law regulating super funds. The relevant law is the Superannuation Industry (Supervision) Act 1993 (“SIS”) and its Regulations and, if a dispute arises, the Superannuation (Resolution of Complaints) Act 1993. Trust deeds vary from fund to fund. Typically however, a clause to the following effect will be found in a trust deed:

‘The Trustee in its absolute discretion may pay a death benefit to the one or more of the following:

• a dependant or dependants of the deceased;
• a person who is wholly or partly dependent upon the deceased at the time of his or her death;
• the legal personal representative of the deceased ie the executor of the estate or a person to whom letters of administration have been granted;
• where none of the above can be identified, an individual.”

“Dependant” is defined to mean:

• a spouse of the deceased (including a de facto spouse who is residing on a bona fide domestic basis with the deceased at the time of death) but does not include a same sex partner;
• a child or children of the deceased in all of their shapes and forms - children of the relationship, adopted children, step-children and so on;
• a person who is wholly or partly dependent upon the deceased at the time of death’

Such a provisions exists in the context of Section 62[1] of SIS which sets out the sole purpose of superannuation funds and SIS Regulation and which prescribes in which circumstance and to whom a Regulation 6.22 superannuation benefit may be cashed. Unless a Fund’s trust deed has been amended to take in Section 59(1A) of SIS which allows for binding death benefit nominations, but which more often than not is still relatively rare, the Trustee of a fund when faced with this wording has a number of alternatives. The trustee, after obtaining certified copies of the member’s birth certificate, marriage certificate, if any, death certificate (these usually give a lot of clues as to potential recipients as they set out the name of the deceased’s spouse(s) and children), nomination of beneficiary form and will, if any, typically follows the following process:

It makes inquiries:

• to ascertain all of the potential recipients of the deceased’s superannuation death benefit.
• to establish whether the deceased has nominated a beneficiary or beneficiaries. The Trustee considers the date of the nomination and must consider whether it accords with the law. If one does not have a significant heterosexual other, there is no use nominating one’s same sex partner as one’s spouse or in nominating one’s mother as a beneficiary, for example. Unless the same sex partner or mother can prove that he or she was wholly or partly dependent upon the deceased at the time of his death, such a nomination is futile.
• as to whether the deceased’s personal circumstances have changed - for example, whether the deceased had left his or her husband or wife and was residing on a bona fide domestic basis with another man or woman - of the opposite sex at the time of his or her death.
• to establish whether the deceased left a will and, if so, on what date the will was made. If there is no will the trustee will inquire as to whether there is someone who is available, typically a close relative, to apply to the probate division of the relevant State’s Supreme Court for letters of administration. It is usually the preferred option of trustees to request that such an application be made especially if there is a large sum of money involved. If the will was made later than the deceased completed, signed and dated his or her nomination of beneficiary form, it would be in order for the Trustee to take the view that the will is the ‘fresher’ expression of the deceased’s wishes and that the will therefore encapsulates a more accurate expression of the deceased’s wishes. If the nomination of beneficiary form was completed at a later date the converse would of course apply.

Unless the trust deed has been amended to allow for binding death benefit nominations, the payment of a death benefit is entirely at the discretion of the trustee after considering all of the circumstances of the case. This power is given to the Trustee under the provisions of both the trust deed and SIS. SIS Section 58[3] provides that except in certain prescribed circumstances, a Trustee of a super fund shall not be subject to direction by any person. In my experience, where there are dependants, as defined in the trust deed and under the provisions of SIS, it is unusual for a Trustee to opt to pay a death benefit to the legal personal representative or executor of the estate. The reason for this is simple. The main purpose of a fund, as expressed in section 62 of SIS, is to look after the member in the event of his or retirement or in the event of his partial or total disablement or, in the event of the deceased’s death, to provide for the member or for the member’s dependants. There are sound policy reasons for this - it prevents the deceased’s dependants, typically a spouse and children from having to resort to the public purse for their livelihood and, perhaps, more importantly, from the recipient’s viewpoint, there are good tax reasons for this approach. Depending on the class of beneficiary who receives the benefit, tax concessions are available if the death benefit is paid directly to a dependant. Benefits paid to a spouse, a child under the age of 18 years, or a person who is financially dependent on the deceased (up to the deceased’s Reasonable Benefit Limit) will be tax free in the hands of the recipient. However, a death benefit paid to the legal personal representative or to a person who is a dependant under the definition of the deed but not under the definition found in the Income Assessment Act - for example, an adult child who is not financially dependent, will be taxed as an eligible termination payment. If paid to the legal personal representative it will only be tax free to the extent that the Commissioner determines that the ultimate beneficiary/ies will be the spouse, dependent children or otherwise financially dependent persons.

Lawyers practising in this area of the law come across some complicated scenarios. Take for example the woman who dies and nominates her legal personal representative as the nominated beneficiary of her death benefit. She is divorced and leaves behind a ten year old son. The child’s father and guardian are impecunious. Not only is the estate in effect bankrupt due to her many debts but she also leaves bequests in her will for her various relatives which the estate, without the benefit of receipt of the super death benefit, is incapable of paying. What does the Trustee do? Does it accord with her expressed wishes or does it, assuming that this is a deed that does not provide for binding death benefit nominations, go against her wishes and in the best interests of the child decide not to “waste” the death benefit and to set up a trust for his education, welfare and advancement in life? Interestingly, if the Trustee accords with her expressed wishes it may later expose itself to action for a breach of fiduciary duties and trust by the deceased’s dependent (by analogy, see the principles enunciated in Hill v Van Erp (1996-1997) 188 CLR 159).

[See also the following:

Sir Anthony Mason "The Place of Equity and Equitable Remedies in the Contemporary Common Law World", (1994) Vol 110 The Law Quarterly Review 238.

Mr J.D. Heydon QC "Causal Relationships Between a Fiduciary's Default and the Principal's Loss" Vol 110 The Law Quarterly Review 328.

Gummow J "Compensation for Breach of Fiduciary Duty" T.G. Youdan (ed) "Equity, Fiduciaries and Trusts" (1989) p.90.]

Take the man that has allegedly murdered his wife. She does not leave a will but he is her nominated beneficiary. Should he as the nominated beneficiary and dependent spouse of the deceased automatically receive the benefit or should the Trustee wait until the case has been heard. If he is found guilty of murder, should the Trustee pay the death benefit to him or rely on laws preventing persons benefiting from the fruits of crime and/or exercise its discretion to pay the death benefit to the person who obtained letters of administration of the estate under the intestacy laws, then let the Supreme Court sort out the estate once the deceased’s family file proceedings under the provisions of the Family Provision Act 1984. Or, if she has adopted his child, should the Trustee look to the exclusive interests of that child. What does the Trustee do if the deceased has nominated his de facto wife of 20 years as his nominated beneficiary, then they separate and as a result of his depression and 2 days after the separation he commits suicide? Technically, unless she can prove that she is wholly or partly dependent upon the deceased, she is no longer living in a bona fide domestic relationship with him and is no longer an eligible recipient of the death benefit. Although depressed, he has promptly changed his will and leaves his entire estate to the Cancer Council. What if Pilot Pete is married with 3 children, nominates his wife and adult children of his marriage as the beneficiaries of his death benefit. His will reflects a similar expression of wishes. Meanwhile Pilot Pete has not only been conducting a gay relationship for some 12 years with a man who can prove that he is wholly financially dependent on the deceased, but he has also set himself up in another port with a de facto wife who has had a child to him and also can prove that she is also substantially financially dependent upon him. What of the separated husband who commits suicide but changes his nomination of beneficiary form to exclude his wife, nominate his children aged 6, 3 and 2 years old and his non financially dependent mother as beneficiaries? And last but not least what does the trustee do with death benefit of the truck driver who during the working week resides in a boarding house with Mrs A and returns to his wholly dependent de facto wife, Mrs B each weekend. His nomination of beneficiary form has not been completed and his will leaves everything to his children of his first marriage all of whom are adult and financially independent. Mrs A claims that she has been doing more than the washing and that she has been living in a de facto relationship with him for some 10 years, a fact which Mrs A’s daughters and her bank statements may attest to.

The SCT regularly deals with complicated death benefit cases involving combined families and other complexities of human relationships and expectations.

Steps to be taken in identifying to whom a death benefit should be paid

Firstly, the relevant fund’s or funds’ trust deed must be perused to see if it provides for a binding death benefit nomination. If it does not provide this, the adviser must explain the legal ramifications of this to those affected - as explained above. As mentioned above, SIS has now been amended to permit members of super funds to make binding death benefit nominations, IF the governing rules of the fund allow it. In spite of sound philosophical reasons for allowing binding death benefit nominations for example, the move toward greater member choice and a move away from the paternalistic nature of super funds historically - as well as human rights and discrimination law bases justifying such amendments, currently most trust deeds do not contain such provisions. Why you might ask? The main reason is the high cost of administering the amendment, a cost which under the old discretionary regime is and was already high as a result of the claim staking procedures which most trustees opt to follow if they wish to avert complaints being made to the Superannuation Complaints Tribunal under the provisions of the Superannuation (Resolution of Complaints) Act 1994.

In summary and where the discretionary regime has been maintained, the claim staking procedures may be summarized as follows:

• The trustee ascertains all of the potential recipients of the death benefit;
• It obtains statements of financial and personal circumstances from them;
• It makes a decision as to whom and in what proportions the death benefit should be paid;
• It notifies all of the potential recipients, including the executor/legal personal representative of its decision;
• It gives each party 28 days to complain about its decision;
• If a complaint is received, it notifies all concerned and reconsiders its decision;
• It notifies all affected of the decision and tells them they have 28 days in which to complain to the SCT;
• If the disgruntled person does not complain to the SCT within the prescribed period[4] , that person is precluded from lodging a complaint with the SCT. It should be noted however, that except for the usual limitation periods, the person is not precluded from initiating proceedings in the Federal Court.

In advising and setting out these claim staking procedures, affected potential recipients, even though represented, frequently do not get their complaint into the SCT within the requite 28 days and are therefore SCT limitation period excluded. Lawyers acting for such persons have potential liability for negligence claims where they do not advise on the effects of the limitations period.

If a binding death benefit nomination is permitted by the fund’s trust deed, the SIS Regulations make payment to the nominated beneficiary mandatory provided that the requirements in the SIS Regulations are satisfied. If the fund includes a binding death benefit nomination clause while it is the trustee’ s duty to do so in annual statements, clients may still need to be reminded of the need to update his or her nomination form in accordance with the law. To make a binding death benefit nomination, under the SIS Regulations, the nomination (including a revocation notice):

• Must be in writing;
• Must be signed and dated by the member in the presence of 2 witnesses who are:

1. Over the age of 18

1. Are not nominated to receive a benefit in the notice (but may be beneficiaries of the person’s estate, if a legal personal representative is nominated)

• Must contain a declaration signed and dated by the witnesses stating that the notice was signed by the member in their presence.

The trust deed should be read carefully to see if there are any specific restrictions which, if not adhered to, will invalidate the nomination.

The nomination can be accepted by the trustee if:

• Each death benefit nominee is a dependant or is a legal personal representative of the member;
• The proportion to be paid to each nominee is certain or readily ascertainable; and
• The notice is in the approved format

(if not, the trustee has an obligation to seek more information under SIS Regulation 6.17B).

Under the SIS Regulations, the nomination will be binding at the date of death if:

• Each death benefit nominee is clear;
• The notice is in the approved format; and
• The notice is in effect:

- Signed within the 3 years prior to the date of death; or

- A shorter period as defined in the governing rules.

• If the nomination is invalid and not binding the trustee must pay in accordance with the default option - usually the legal personal representative or payment at the Trustee’ s discretion.

Binding death benefit nominations can easily become invalid and open to contest if for example one of the nominated beneficiaries no longer meets the definition of dependant or if the member was in some incapacitated at the time he or she purported to make the binding death benefit nomination. Issues of duress, undue influence and nominated beneficiary causes the death are factors leading to arguments that the nomination if invalid.