Advisor liability risk from super death benefit nominations

Accountants and financial planners who have any involvement in their clients’ superannuation may be the target of lawsuits in future if they cannot show by clear documentation that they provided fully comprehensive death benefit nomination advice (where that is within the scope of their licence) or referred the client out for legal advice on that subject.

The advisor’s role in this regard is hampered by the fact that many Public Funds do not allow members anywhere near the degree of flexibility required to make a proper DBN. Although an advisor may not have as much liability risk where the fund does not permit proper DBNs, they would still be concerned that their client is getting a sub-optimal estate planning outcome in these cases. In some cases, where the risk of a weak DBN could lead to unintended beneficiaries receiving death benefits, and the member's Public Fund will not permit them to make a proper DBN, it may be necessary to advise the client to consider rolling their benefits out to a self-managed fund.

Superannuation is many people’s second-largest asset. The average person takes considerable care in how they pass on non-superannuation assets under their will. A proper will provides for what happens in various different contingencies, such as if the person is or is not survived by a spouse/partner and, if they are the survivor, what happens if one or more of their children dies before them with or without leaving children. In contrast to the care taken with wills, when it comes to DBNs it is not uncommon to see several hundred thousand, or even a million dollars plus, dealt with by the simple one-liner: “On my death I direct the trustee to pay my superannuation death benefits to my wife”. In many Public Funds, this is the extent of the details which the member is permitted to include on the standard DBN form.

In some circumstances it may be appropriate for a DBN to specify that if the member’s spouse/partner survives them, the survivor can take the deceased member’s DBN as a pension but if their spouse/partner does not survive, the member’s superannuation is paid to their estate. If there is a possibility of a challenge to the member’s will under the Family Provision Act (WA) (or interstate equivalents) the member may not wish to have their death benefits dealt with under their will, but may wish to pass them directly to intended beneficiaries under a DBN.

A proper DBN should deal with at least the following contingencies and issues:

• If the member’s spouse/partner survives them

• If the member’s spouse/partner does not survive them

• If the member’s spouse/partner does not survive them, and they are leaving death benefits to children, what if none of their children survive them?

• What if the member (currently married) is divorced by the time of their death? (Divorce automatically revokes a will, but not a DBN).

• What if the member (currently un-married) is married by the time of their death? (Marriage also automatically revokes a will, but not a DBN).

• What if the member (who was married or in a de facto relationship when they made the DBN) is separated at the time of their death? (Separation can be hard to define, but it should still be addressed).

• Should the death benefits be paid as a lump sum or pension, as a combination or should the recipient have a choice about the form in which to take the benefit?

• Does the DBN prevail over a reversionary pension, or vice versa? (This will need to be checked for consistency with the fund deed).

• Where the death benefits will be paid to the member’s estate, what if their estate is insolvent?

• What if a person who would otherwise receive death benefits is bankrupt?

• Should a tax equalisation clause be included where one or more recipients may be a tax law dependant of the deceased member whereas one or more other recipients may not be, and thus be liable to death benefits tax?

• Where the death benefits are taken as a pension, what if it causes the recipient to exceed their TBC? In that case, should the pension automatically partially convert to a lump sum to the extent required to ensure that result does not occur. Alternatively, the beneficiary may wish to partially commute their existing pension.

Public Funds do not wish to have to deal with the wide range of possible DBNs which could be drafted if people were given free choice in how to do so. Yes, if they allowed proper freedom to make comprehensive DBNs, some DBNs might contain ambiguous clauses which could be resolved only by a court. But that risk has been accepted for hundreds of years under the law which permits adults full flexibility in how they deal with their non-superannuation property under their wills. The risk of the occasional uncertain DBN is a small price to pay for giving fund members proper control over the future destination of such large amounts of money.

In most Public Funds, members can usually forget entirely about dealing with separate portions of their death benefits in different ways, or specifying whether they are paid as a pension and/or a lump sum. Potentially even worse, many Public Fund DBNs are either lapsing (where they are only binding for three years and then become non-binding unless refreshed) or non-binding from the start. This is a recipe for estate planning disasters. Urgent legislative reform is needed to require Public Funds to accept fully flexible DBNs.

Even though Self-Managed Super Funds allow much more flexibility, often enough making a proper DBN is overlooked in these funds too. 

Stephen Gethin, Director, Fortuna Legal Pty Ltd