Challenging a Superannuation Death Benefits Payout

There are actually many more ways to challenge a death benefit payout than there are grounds to challenge a will. Will challenges are made principally on the grounds of the will-maker lacking mental capacity to make a will or under the Family Provision Acts of the various States. These Acts allow close relatives of a deceased to challenge a will if the court considers it did not make a fair provision for them.

Most of the grounds for challenging a death benefit payout are capable of applying whether the superannuation fund is a self-managed fund or an industry or public fund. Some of the grounds have been simplified in this article. Some of the grounds mentioned may not raise an open and shut case, but involve complex legal arguments. Cases of that kind are still a fertile ground for disputes, however. A person claiming against a fund trustee often does not need a clear case: they simply need to raise enough uncertainty to make it worth the trustee’s while to offer a reasonable settlement.

Just because a superannuation death benefit payout is invalid does not mean that any given person aggrieved by it has an entitlement to any of the benefits. They also need to establish a basis on which they are entitled to claim them, once the invalid payment is set aside. If, for example, a DBN is held to be invalid any earlier, valid, death benefit nomination would revive. If a payment scheme is set aside and there is then no valid death benefit nomination in effect, the fund trustee will need to decide whether to pay the death benefits to the deceased member’s estate, to be distributed according to their will, or pay them direct to one or more Superannuation Industry (Supervision) Act (SISA) dependants of the deceased.

The children of a deceased fund member could benefit, for example, where the member had re-married and their new spouse had procured the execution of an invalid DBN in favour of themselves. The children would be in the best position to benefit if they were the executors and beneficiaries of the deceased’s will, the fund is an SMSF and they are in a position to take control of the office of the fund trustee. If, however, the fund is a public fund the trustee may still exercise their discretion to pay some or all of the death benefits to the member’s widow.

The following list of potential grounds for a death benefit challenge are divided into three categories: where there is a death benefit nomination (DBN), where there is no DBN and where the existence of a DBN is not relevant. Some of these grounds may not apply to government funds. There may be grounds which apply to government funds which are not listed here.

Cases where there is a DBN

• The DBN is stated to be binding (a BDBN) where the fund deed does not provide for BDBNs. This is likely to be an issue with older SMSF deeds only. Most, if not all, modern SMSF deeds provide for BDBNs or the equivalent. A related issue may arise in public and industry funds – see the next item.

• A lapsing binding DBN is treated as binding after it has lapsed. If a member of a public or industry fund makes a binding death benefit nomination, it is binding for three years only, unless and until it is refreshed. After that three-year period, it becomes a non-binding DBN. The trustee may still distribute death benefits according to a lapsed BDBN, however they are not entitled to proceed as if they are bound by it. The trustee must also consider alternative methods of distribution before making a decision in that case.

• The member lacked mental capacity to make the DBN.

• The DBN was not executed in accordance with any required formalities in the fund deed. The fund deed may, for example, specify that the DBN must be executed before a witness but the member may not have had their signature witnessed.

• The DBN is not in accordance with the required form in the deed. Some (mainly older) SMSF deeds specify that a DBN is valid only if it is made in accordance with a certain form. The requirement for a a specific form may be more prevalent in industry and public funds. This ground could include a case where a DBN covers alternative scenarios, whereas the fund deed does not permit it to do so. The rules of public and industry funds tend to be more restrictive about the degree to which a DBN may provide for alternative survivorship scenarios than SMSF deeds.

• The DBN was executed by an attorney. Despite a Queensland case, Narumon, 2018, upholding the validity of a DBN executed by an attorney, this is a developing area. Whether an attorney can validly execute a DBN may depend on whether a DBN is a testamentary (will-like) document. The WA SAT, in a case before a three-member panel led by a District Court Judge, held that a DBN is a testamentary document, although the case was about the powers of an Administrator not an attorney. This decision raises the argument that a DBN may not be executed by an attorney in WA. Courts of other States may come to different conclusions because of differences in State laws.

• The DBN was executed by an attorney (in States where that is permitted) with a conflict of interest. The DBN may be invalid if the attorney made it in circumstances giving rise to a conflict of interest because, for example, they will receive a benefit under it, where the member did not approve the conflict at a time when they had mental capacity to do so.

• The DBN is executed by a Guardian or Administrator for the fund member. The WA SAT has held that an administrator has no power to make a DBN for a fund member, on the basis that a DBN is a testamentary document. There could be no question of a Guardian having power to make a DBN, because a Guardian’s responsibilities are limited to non-financial matters.

• A pension is paid to a reversionary beneficiary after the death of the first recipient, inconsistently with a DBN. Whether a DBN overrides a reversionary pension or vice versa will normally depend on the correct interpretation of the deed. If the deed drafter did not consider the issue, then the outcome may be unclear – which may well be enough reason for a dependant who missed out to make a claim.

• The DBN is made in favour of a person who is not an dependant of the member under the SISA. The SISA states that a death benefit may be paid only to a person who was a “dependant” of the member, as defined in that Act. Dependant includes “spouse”, which in turn includes “de facto partner”. There is often room for dispute about whether two people were in a de facto relationship. Note that the SISA definition of dependant is somewhat different to the in the Income Tax Assessment Act 1997.

Cases where there is no DBN

• The fund trustee/trustee director is also the executor/administrator of the estate but uses their trustee's discretion to pay the benefits to themselves. In one case a court held that an SMSF trustee who was also the administrator of the deceased's intestate estate has an overriding duty as Administrator to benefit the beneficiaries of the estate, and was thus obliged to pay the death benefits to the estate. This decision is capable of applying equally where the SMSF trustee is also the executor of the deceased's will.An executor or administrator who wishes to exercise their capacity as trustee to pay death benefits to themselves in this situation should renounce their right to be executor/administrator before making any decision about distributing death benefits in their capacity as fund trustee.

• The trustee has a fixed policy on whether to pay death benefits to estates or SISA dependents. It is suspected that some industry/public funds have fixed policies on whether to pay death benefits to the executor or to one or more SISA dependants which they apply in all cases, without considering the merits of respective beneficiaries. A trustee is not permitted to exercise a discretion according to a policy; it must always consider the merits of the individual case when making a decision. Setting aside a decision made on this ground, however, may not necessarily result in a different decision being made. The trustee may be ordered to reconsider their decision, but they may still reach the same decision by following a proper process.

Where the existence of a DBN is not relevant

• The fund trustee pays the death benefits to the estate, either under a DBN or by exercising a discretion where there is no DBN. In this case the death benefits are treated as part of the deceased member's estate for the purposes of a will challenge under the Family Provision Act.

• The payout is inconsistent with a family law super split.

• The member lacked mental capacity to establish the SMSF or create their account in a public/industry fund.

• The member lacked mental capacity to make a particular, substantial contribution to the fund. In this case the asset or funds contributed may form part of their estate instead.

• The fund trustee/trustee director is ineligible to serve in that capacity, due to being disqualified under the SISA or the Corporations Act or due to mental incapacity. (Whether this would have the result that asset purportedly held in the fund are in fact not part of the fund is a complex question, which is beyond the scope of this article. It would be worth investigating whether a case exists if this circumstances arose, however. This ground is more likely to arise in relation to an SMSF than a public/industry fund.)

This article is not legal advice oor financial advice. No one should act on any information in this article without taking specific legal advice on their situation. This article is based on law current at 23 January 2020. Matters of State law reflect the law of Western Australia only, which may be different to the laws of other States and Territories. Some of the conclusions expressed are based on decisions of Courts, which may be overruled or not followed in later decisions, or on statutes, which may change in future.