Sacred Obligation

Article by Roger Thomson

as featured in the Farm Weekly issue 16 December 2021

I am often queried by clients “Who controls my SMSF if I die?”  

My answer is that you look to the rules of the SMSF, which are contained in the trust deed. However, that is not all, as there are quirky circumstances in each SMSF which can require careful consideration of all of the deceased’s circumstances and documentation. Let’s consider this scenario.

Mum and Dad are individual trustees of their SMSF. They both have valid Wills which are reciprocal and appoint each other as Executor. For their super, their intention is that if one of them was to die, then the surviving spouse will continue the SMSF after receiving the deceased member’s super death benefits in a tax effective manner. Sounds familiar? Sure it does! But how could the outcome deviate from the intention?

An SMSF trustee controls the purse strings of the SMSF, even where a member dies. The SMSF trustee is not bound by the Will of the deceased, rather it looks to the SMSF deed and any Binding Death Benefit Nominations (BDBN’s) or reversionary pensions in place, before paying super benefits to the surviving spouse.

In the above example, if Dad dies first, his Will firstly distributes some of his personal estate to his kids, and then the balance to Mum. Dad unfortunately has an invalid BDBN, but Mum treats the SMSF as her own, without proper authorisation. This is where problems may start.

The courts become particularly upset where the SMSF trustee does not understand the documentation and particularly when the SMSF trustee, Executor, and beneficiary under the Will are the same person, as is Mum in this circumstance.

If Dad’s estate is challenged by any of his kids, Mum clearly has a conflict of interest from wearing so many hats. The “sacred obligation” of an SMSF trustee to follow the rules of the deed and the sacred obligation the Executor has to the beneficiaries of the Will, is rapidly developing law in Australia. Recent cases such as Burgess v Burgess and McIntosh v McIntosh indicate this.

The take home messages for those with an SMSF are:

• Ensure that applications to receive benefits are not made without first considering possible conflict implications
• Ensure you implement robust SMSF succession and death benefit strategies, including special provisions in Wills, EPoAs, BDBNs and other legal documents

Take proper advice and ensure your affairs are in order and regularly reviewed. You don’t want to leave your surviving family a case testing these “sacred obligations” in the courts.

To discuss this article further, we encourage you to contact Roger Thomson on (08) 6274 6400, or your Byfields accountant.

_{Disclaimer: This content provides general information only, current at the time of production. Any advice in it has been prepared without taking into account your personal circumstances. You should seek professional advice before acting on any material.}