The Barrie and Suzie Super Fund Case - Drafting is everything!

Precise drafting for Binding Death Benefit Nominations (BDBNs) is everything.  Informal drafting may well defeat the intentions of the members and their SMSF advisers.  As happened to Barrie’s super benefit.

Barrie was a member and trustee of the Barrie and Suzie Super Fund.  The other member and trustee was Barrie’s second wife, Suzie.

Barrie, a lawyer, instructed his SMSF advisers to prepare a BDBN which named “The Trustee of my Estate” as his beneficiary.  The intention of the nomination was clear – his superannuation benefit was to go to his Estate to be dealt with by the elaborate provisions of his last will and testament.  In particular, his two adult daughters from Barrie’s first marriage were each to receive a 1/3rd portion of his residuary estate with the other 1/3rd portion allocated to Suzie.  Without the superannuation benefit the estate minimal value.

Barrie signed the death benefit nomination which was prepared by his SMSF adviser as he had instructed – that the death benefit was to be allocated to “Trustee of Deceased Estate”.

On Barrie’s death, Suzie (the second wife) became the sole surviving trustee of their joint SMSF. Suzie appointed a second trustee – her daughter from Suzie’s previous marriage.

If the nomination was valid – Barrie’s super benefit would go to his Estate and, eventually, be split equally between his two daughters and Suzie – each getting a third.

If the nomination was invalid – Barrie’s super benefit would be allocated at the discretion of Suzie and her daughter and, following in the footsteps of the Conti Super Fund Case, the death benefit could be allocated exclusively to Suzie in her capacity as Barrie’s widow.

Conflict commences

The conflict commenced when Suzie and her daughter determined that Barrie’s nomination was invalid.  Rather than simply (and possibly disastrously as happened to Mrs Morris in the Wooster & Morris Case) relying on their own judgment, they notified Barrie’s daughters of their intention to treat the Nomination as invalid.  

The daughters naturally sought to protect their position and commenced legal action seeking a court determination as to whether the Nomination was valid.  Suzie and her daughter were joined in the legal action as the trustees of the fund.

Court consideration

The Court carefully considered the validity of the Nomination.

First, the Court considered whether the Nomination was invalid because it did not satisfy the relevant SIS requirements which are set out in SIS Reg 6.17A.

The Court concluded that the relevant SIS requirements of will-like execution and a three year duration did not apply to SMSFs and, so, did not apply to the Barrie and Suzie Super Fund.

Secondly, the Court considered whether the provisions of the trust deed of the fund imported the requirements of SIS Reg 6.17A.  The Court held that the trust deed did not.  While the trust deed had a general compliance provision, this provision was carefully drafted and only imported those SIS requirements which apply to SMSFs.  As the Court had held that SIS Reg 6.17A does not apply to SMSFs, then the general compliance provision did not import those requirements in the trust deed.

The Court then considered the meaning of the term “Trustee of my Estate”.  The Court reviewed the SIS requirements and noted that a nomination, to be binding, had to nominate one or more eligible beneficiaries.  The “legal personal representative” is specified to be an eligible beneficiary.  The Court then had to consider whether the “Trustee of my Estate” is the same entity as Barrie’s legal personal representative”.  

The decision of the Court was that the legal personal representative means the “executor (or administrator) of the deceased estate”.  The Court made a technically correct (albeit fine) distinction between the estate and trusts which arise once the executorial phase has been completed.  The Court consequently held that “Trustee of my estate” did not refer to the legal personal representative and therefore the BDBN was invalid as it nominated a person who was not an eligible beneficiary.

As the BDBN was invalid, the fall-back position of the trust deed (as is very common in most superannuation deeds) was that the death benefit was to be allocated at the discretion of the trustees to, or amongst, the eligible beneficiaries of Barrie: namely Suzie, Barrie’s daughters from his first marriage, Barrie’s Estate and, possibly, Barrie’s step daughters (being the daughters of Suzie).

Whether any decision has been made by the trustees rgarding this, the details of the decision, is not known.  

The significance of the Case

The case is significant for four reasons.

First, this is the first judicial consideration of whether the will-like execution requirements and three year duration limit on BDBNs applies to SMSFs.  The Court held that those provisions do not apply to SMSFs.  The Court considered and approved the reasoning set out in the Determination issued by the ATO: SMSF 2008/3.

Secondly, the Court considered the observation in the Donovan v Donovan Case and distinguished the effect of the general compliance provision of the SMSF trust deed being considered in the Donovan Case from the corresponding provision of the trust deed of the Barrie and Suzie Super Fund.  The distinction being that the general compliance provision in the trust deed of the Barrie and Suzie Super Fund only incorporated SIS requirements which applied to self managed superannuation funds.  The trust deed considered in the Donovan Case incorporated SIS requirements which applied to complying superannuation funds – whether self managed super funds or APRA regulated funds.

Thirdly, the Case illustrated the correct procedure to follow where a trustee considers a nomination to be invalid.  In this case the trustees advised Barrie’s daughters of their view of the invalidity of the nomination and allowed the daughters to commence legal proceedings to determine the validity of the nomination.  By this means, the trustees did not compromise their indemnity rights.  Had the daughters not commenced proceedings, the trustees could have sought the advice of the Court as to the validity of the nomination and permitted the daughters to be parties to the proceedings.

Finally, the Case clearly demonstrates that if the death benefit is to be paid to the estate of the deceased member (and allocated in accordance with the provisions of the will) then the nomination must use the terms “My Legal Personal Representative” or “My Estate” or “The Legal Personal Representative of my Estate”.  Any other expression (unless there are special saving provisions in the governing rules of the fund) is likely to be an invalid nomination.

What are the consequences for SMSF advisers

There are two emerging trends in super.  The first is that death benefits may be more valuable than the deceased’s estate – so greater attention will be applied to whether nominations are valid and whether trustee’s discretions have been validly exercised.  Secondly, binding death benefit nominations are increasingly likely to be exposed to significant forensic examination to ensure that they comply with the relevant trust deed requirements.

SMSF advisers should review their clients’ BDBNs to check whether the expression “Trustee of my Estate” or “My Trustee” has been used.  If so, the nominations are (in the absence of saving provisions in the governing rules) open to attack and must be replaced by correctly drafted nominations.

The Barrie and Suzie case also raises the issue of SMSF adviser liability to disappointed beneficiaries where the disappointment arises from drafting errors on the BDBN.  Solicitors who draft wills are financially liable to beneficiaries who “miss out” because of inadequate drafting.  It seems that SMSF advisers who draft BDBNs would, in principle, be exposed to a similar liability.  In the Barrie and Suzie case, the BDBN prepared reflected the express instructions of Barrie.  It may be that any responsibility the SMSF adviser would otherwise have had has been much reduced or eliminated because of specific drafting instructions given by a legally qualified client.