The common theme in death: part one

More often than not, superannuation is a significant factor when a person dies. In part one of this two-part series, Jemma Sanderson, director at Cooper Partners, highlights certain actions that can be taken to ensure death benefits are passed on to the right people.

With our ageing population, superannuation becoming a significant asset for many Australians and the introduction of the transfer balance cap (TBC) provisions effective from 1 July 2017, there are a plethora of considerations when an SMSF member dies. Importantly, things may not always be as they seem within a fund and it is useful where possible to put all the pieces of the puzzle together before death.

BDBNs

Fund members may be unconcerned about what happens upon death with their super as they have a binding death benefit nomination (BDBN) in their fund, or the favourite reassuring thought that “it’s okay, it’s in my will”. However, as cases in recent times have shown us, who receives the money or who makes the decision about the money can rest on the presence or not of a BDBN or similar instruction to the fund.

Issues that are often encountered with BDBNs (or similar binding instructions) include:

1. The nomination doesn’t articulate an eligible beneficiary under the Superannuation Industry (Supervision) Act and therefore it is invalid (as demonstrated in Munro & Anor v Monro & Anor [2015]).

2. If the nomination isn’t executed in accordance with the deed, then it will be invalid.

3. Where a nomination is invalid, the deed will then prescribe the decision-making with respect to the benefits: a. trustee discretion, b. executor/legal personal representative decision-making, c. payment of a lump sum to the estate.

4 . The trustee will need to undertake a claim-staking process to ensure they are exercising any discretion in a fair and reasonable manner (as determined in Marsella v Wareham [2018]).

5. Even if there is a valid BDBN in place, does it conflict with the terms of a reversionary pension, and if this is the case, which documentation takes precedence?

Accordingly, ensuring the instructions to the trustee are robust and complying is an important step.

Where are the original pension documents?

Where there is a pension, or multiple pensions, in place, it is important to understand whether the pensions are reversionary or not. Where there are multiple pensions in place, some could be reversionary and some may not be reversionary. The only way to know for certain is to look at the original pension documents as you cannot rely on the member statement within the financial statements of a fund to be absolute in this regard.

This can be more challenging than it seems as over time many pension documents may be mislaid or lost, as was the case in Re Narumon Pty Ltd [2018]. Unlike the outcome of this case, where the representation of a legacy lifetime pension as reversionary in the financial statements over numerous years was sufficient to confirm the reversionary status of the income stream in question, the accounting treatment in the financial statements or reference in the financial statements that a pension is reversionary is insufficient.

To distinguish from Re Narumon, most pension accounts within an SMSF are account-based and the annual minimum pension payments are based solely on the pensioner themselves, where the reversionary beneficiary’s age is irrelevant.

Things may not always be as they seem within a fund and it is useful where possible to put all the pieces of the puzzle together before death.

Where a legacy lifetime pension stipulated a reversionary beneficiary upon commencement, that reversionary beneficiary’s age, gender and life expectancy were then determinative of the terms and conditions of the pension itself. Further, actuarial calculations were undertaken at commencement based on those factors and as such the annual representation of such an account as a reversionary pension in the financial statements, particularly given an annual actuarial report was required, was not the ideal evidence, but was considered sufficient.

Therefore, for a non-lifetime pension, such as an account-based pension, it is not enough for the financial statements or member statements to say a pension is reversionary as that status does not impact on the annual financial status of that pension or the pension payment requirements, and so the original pension documents need to be located.

The decision to make a pension reversionary or not is very important and cannot be undertaken lightly. As outlined in the article entitled “Reversionary or reversionary-not – there is no try”, written by this author and published in selfmanagedsuper issue 027, since the introduction of the TBC there are additional considerations in this regard. Ultimately, it is important all of the issues are contemplated and that a pension is made reversionary to an individual only where they are the intended beneficiary.

It is not uncommon to review pension documents in light of a member’s wishes and unearth the intention that they desire their superannuation benefits be paid to their children upon their death, but their pension is reversionary to their spouse. This is a recipe for disaster and conflict and needs to be considered, in particular, how to unravel the situation.

Changing a pension in situ

It remains an untested area whether the reversionary status of a pension can be altered without ceasing and recommencing it. There are various reasons why changing the status in situ is preferred to commuting and reestablishing a new income stream, such as:

1. Commonwealth Seniors Health Care Card (CSHCC)

Pensions in place prior to the end of the 2015 calendar year, and where the member was in receipt of the CSHCC prior to that time, are eligible for grandfathered income testing treatment for CSHCC purposes. Where a pension was ceased and recommenced to change its reversionary status, this would be treated as a new income stream that would lose the CSHCC grandfathering and may result in the member losing this benefit entirely.

If an adviser was to implement such a strategy that ultimately leads to the loss of the CSHCC, they would likely be persona non grata with their client.

2. Minimum pension payments

The new pension could have a pro-rated minimum pension applicable to it. If the member had already taken out their minimum from their previous pension for the relevant year, they would be required to take out further pension amounts prior to the end of the financial year unless the restructure occurred in June of a relevant year.

3. Taxation components

One of the main concerns is the aggregation of taxation components that would arise if a pension was ceased and recommenced (and where the member also has an accumulation account). Pension taxation components are kept separate to those of an accumulation account until that pension is commuted or rolled back to accumulation, at which point the taxation components are aggregated.

The commencement of a new income stream would then have new taxation components and that may jeopardise long-term estate planning strategies.

Considering the above, being able to change this status without having to stop and recommence a pension would be attractive. The ATO has indicated that where the governing rules of a fund allow such a change, then it could be implemented. However, it is not an area that has been tested through the courts in terms of a dispute regarding the recipient of a benefit where the reversionary status of an income stream was changed.

As outlined in the selfmanagedsuper article mentioned above, there may not be a substantial difference between an income stream being reversionary or not where the intended beneficiary is the same, such as the surviving spouse. However, one of the bigger issues arises when a pension is reversionary to a second spouse and the intended beneficiaries are the children from the first marriage. Or where there is acrimony between the spouse and their stepchildren, and the certainty of the parent that their new spouse receives the pension’s funds is of utmost importance, but the pension is not currently reversionary.

In these circumstances, there may be alternative methods to achieve the intended outcome without having to cease and recommence a pension for absolute certainty, including:

1. Where a pension is not reversionary, and the intention is for it to revert to a spouse with certainty and without the possibility of children being able to challenge, such a decision has to ensure there are robust documents within the fund to stipulate the spouse is to receive a new pension with the monies upon death.

It could also be worthwhile protecting the succession of the fund to the spouse and potentially establishing a new SMSF to which the remaining accumulation account is transferred and then paid to the children (where that is the intention).

The new fund would then be governed with robust documentation regarding the payment of the benefits on death.

The decision to make a pension reversionary or not is very important and cannot be undertaken lightly.

2. As indicated previously, a recipe for disaster is where there is documentation in place making a pension reversionary to a spouse when the intended beneficiaries are the children. This can often be the case in a blended family scenario. One way to rectify this situation without ceasing the pension is to review the trust deed of the fund. Many modern SMSF trust deeds specify which strategy takes precedence when a reversionary pension is in conflict with a BDBN. If the deed for the fund stipulated a BDBN has priority over a reversionary pension, then having such a deed in place would provide that solution. In such a circumstance it would be imperative:

• that a BDBN was executed correctly under the deed,

• that the BDBN was drafted appropriately such that it paid the benefits out to the children and preferably also referenced the relevant clauses of the deed that provided the precedence of a BDBN over a reversionary pension, and

• to ensure that any future deed updates did not thwart the intended strategy.

In such a scenario, to ensure certainty and to avoid any litigation, it may be appropriate to acknowledge the issues with the tax components being aggregated, additional pension payments for that year and the loss of the CSHCC concession, and then decide to cease and recommence such a pension.

Everyone’s circumstances are different and the ultimate decision to make a pension reversionary or not is substantial as changing it in the future where the member has benefits in superannuation above their TBC can be challenging without other implications.

Having the right documentation in place is vital and it could be worthwhile deed shopping to ascertain whether the rules of the deed will achieve the intended outcome, and if not, consider having a bespoke deed drafted.