Case law update: SMSFs and the payment of death benefits

This week we bring you an interesting case from Western Australia which shows the importance of:

  • having a binding death benefit nomination, and
  • ensuring that the succession of your SMSF passes properly upon your death.

Ioppolo & Hesford v Conti

Mr and Mrs Conti were the individual trustees of their SMSF. In her will, Mrs Conti directed that all of her superannuation entitlements were to be paid to her children, effectively cutting out her husband.

Following the death of Mrs Conti, Mr Conti changed the trustee of the SMSF to a corporate entity with himself as the sole director. He then used his discretion as trustee to determine the payment of Mrs Conti’s death benefits. Unsurprisingly, he determined to pay all of these death benefits to himself. The children challenged his decision in the Supreme Court.

The Court found in favour of Mr Conti, rejecting the children’s argument that Mr Conti had not acted in a bona fide manner as trustee. In the absence of a binding death benefit nomination, the Court found that Mrs Conti’s instructions in her Will were not binding on the trustee of the SMSF.

The Court was of the opinion that just because the children could have been appointed as trustees of the SMSF under Section 17A of the SIS Act did not mean that they had to be appointed. Mr Conti was well within his power to change the trustee of the SMSF and refuse to appoint the children as trustees.

This case is similar to the reasoning in Katz v Grossman, which similarly found in favour of a ‘rogue’ trustee.

How can you avoid this from happening?

The case highlights the importance of binding nominations in relation to death benefits, particularly when the nomination is likely to be contentious. To avoid this situation occurring, clients should ensure that, as much as is possible, binding nominations have been completed for any interest a client may have in an SMSF.

In addition, if the Deed for the SMSF had been written correctly, it could have had in place restrictions that meant the husband would not have been able to pay the benefits to himself. To do so, the Deed would need to have:

  • dictated that the personal representatives of the deceased were required to be appointed as trustees, and
  • provided for an appropriate mechanism to achieve this.

Then, when the husband had attempted to pay himself the benefits, the other trustees could have voted against that resolution.

Do you have a client who has a sticky family situation or unusual wish for payment of their death benefits? If so, speak to Castle today about ways to prevent them from coming unstuck. Call us on 03 9898 6666 or send us an email.