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SMSF inheritance disputes

Courts are taking a stricter approach towards self managed super fund (SMSF) related legal battles. The growing number of SMSF inheritance disputes, over assets held in them, are creating new issues for Will-makers, trustees, and beneficiaries.

Background: SMSF inheritance disputes

Legal disputes over trusts and SMSFs continue to escalate, creating the demand for increased protections to safeguard against future uncertainty. Recently there has been a marked rise in legal wrangles over trusts and SMSFs in the past year.

People’s assets and wealth are increasingly being held in SMSF’s to take advantage of the favourable tax concessions and relative safety from an asset protection perspective. However, while this trend greatly benefits the beneficiaries in the SMSF while they are alive, things get a little more complex when someone dies.

It is usually the surviving spouse or partner who is the Trustee of the SMSF or a director of the trustee company that acts as Trustee. However, the terms of the Will do not necessarily bind the surviving Trustee. This is source of conflict lies, with some surviving trustees electing to pay the SMSF assets to themselves or members of their own family, despite the deceased’s wishes to do otherwise.

Trustee discretion and conflicts of interest are two focus areas growing from a litigation perspective. The superannuation industry still has a fair way to make sure it can deal with these issues properly. The amount of inheritance disputes is forecast to continue rising as the $730 billion-plus in an estimated 593,000 self-managed super funds grows.

What is an SMSF?

An SMSF is a superannuation trust structure designed to benefit members upon retirement. The main difference between SMSFs and other superannuation funds is that SMSFs are private funds where the members are also the fund’s trustees. SMSFs must have one member and a maximum of four members, and one of the main advantages is the level of control the trustees have when tailoring the fund to meet their individual needs.

In June 2021, ATO figures indicated that there were 597,900 self-managed superannuation funds in Australia. Although COVID-19 caused a brief dip in SMSF funds in early 2020, the sector has shown steady growth ever since.

There can be problems having a fund with several members from a practical perspective. Each member may have different goals regarding investment, and operating an inter-generational fund with different goals can be difficult.

The reality of such an arrangement is that if there are disputes within the family, the fund may need to be concluded, triggering a division of the fund assets or a forced sale from which cost and taxation implications may arise.

There are distinct advantages to proper estate planning when a self-managed superannuation fund is available. The main advantage is that if you plan well, your money is distributed the way you desire after your death, and you want to benefit from the assets will ultimately.

How is an SMSF dealt with upon death?

When a self-managed superannuation fund member dies, a death benefit payment is generally made to their dependant, another beneficiary, or legal personal representative. The death benefit payment is made as soon as practicable. The payment can be made as either a lump sum or income stream if the beneficiary is a dependent. If the beneficiary is not a dependent, they must be paid as a single lump-sum payment.

The ATO will generally allow up to six months for the payment to be made. If it takes longer than six months, then the SMSF trustee may be required to explain the reason for the holdup. The tax office may accept reasons such as the death benefit nomination being disputed by beneficiaries or the uncertainty of eligible beneficiaries. But if the Trustee is seen to have taken unreasonable time to pay out the death benefit without appropriate reason, then the tax office may take compliance action against the SMSF.

As superannuation does not inadvertently form part of your estate, it is essential to ensure you have all the documents in place, including a valid Will and death benefit nomination, to ensure this asset is dealt with accordingly.

The type of death benefit nomination or directive you provide to the Trustee of your SMSF will depend on your circumstances.

According to your superannuation fund, a superannuation death benefit can be paid to:

  • Member dependants – spouse, children, or financially dependent individuals
  • Member’s legal representative to form part of their estate.

When the death benefit is paid to the LPR, there is no restriction on who can receive the death benefit under the Will terms. However, there are tax implications concerning the death benefit that you may wish to consider.

Trustee discretion and conflicts of interest

When there is no valid death benefit nomination, a trustee can exercise their discretion under the fund’s governing rules regarding the payment of the death benefits to beneficiaries. As a result, conflicts may arise where the Trustee falls within the category of an eligible beneficiary.

In exercising discretion in good faith, the Trustee should:

  • determine all entitled beneficiaries of the deceased, their relationship to the deceased, and their financial situation.
  • Understand the deceased member’s wishes detailed in their Will or any non-binding nomination.
  • Seek specialist advice from an experienced Wills and Estates lawyer relating to the payment of death benefits, mainly where the Trustee is also a deceased beneficiary.

It is essential to ensure all potential beneficiaries are identified by the Trustee and considered concerning the decision of payment of the death benefit and ensure that:

  • Documentation is put in place that details the Trustee’s decision-making process to exercise their discretionary powers. This will assist in demonstrating that a trustee has made all reasonable inquiries of potential beneficiaries and their circumstances to give factual and genuine deliberation in their decision to pay a death benefit.
  • You should complete adequate documentation on a case-by-case basis and caution using a Pro-forma template to document these decisions. This could create problems in establishing genuine consideration given by the Trustee. There is potential for a challenge to the Trustee’s decision in these cases. However, if appropriate documentary evidence is in place, it will support that the Trustee has acted per their responsibilities as Trustee of the fund. It is essential to note from the Marsella case that a trustee is not obligated to justify their decision.

Potential conflicts of interest that can arise re-affirm the importance of obtaining specialist advice and implementing proper estate planning, including completing a valid, binding death benefit nomination if this suits your specific circumstances to protect your assets and your beneficiaries.

The importance of seeking professional advice in SMSF inheritance disputes

The requirement for SMSF trustees to have access to specialist financial advice and the regulatory complexity continues to increase. There are now approximately 1.1 million fund members, spread across about 600,000 funds. Their assets stood at $822 billion as of June 30 last year.

There is no dearth of recent examples where specialist advice can be advantageous.

As of July 1 last year, the rules changed to permit SMSF membership to increase from four to six, with clear benefits for families and business partnerships. However, there are also risks, with more decision-makers potentially leading to other disputes.

New rules concerning downsizer super contributions also take effect from July 1 next year, with the minimum age lowered from 65 to 60.

When selling the family home, it will enable those approaching retirement to make a one-off post-tax contribution of up to $300,000 per person.

Downsizer contributions, which are not included in the concessional and non-concessional contributions caps, are another reform where getting an informed opinion has merit.

COVID-19 has been a changed this environment in many ways.  One of the more positive outcomes is a greater sense of urgency in calls for access to more affordable financial advice.

This follows a n increase in demand for financial advice regarding issues such as the loss of a job, uncertainty over retirement plans, life insurance and early access to super on the one hand .

In June, ASIC told a House of Representatives Standing Committee on Financial Services and Economics that its own research shows consumers want access to scaled and affordable personal advice. By scaled, it means less complicated advice on single issues rather than a full-scale financial plan referred to as a statement of advice (SOA).

Vogue Advisory Group – providing specialist advice to our clients with SMSF’s and trusts.

We help you with all of your SMSF and trust needs. If you require any advice, please get in touch with us.