A family dispute over superannuation death benefits has led to a legal bill of more than $370,000 charged to a self-managed super fund (SMSF) to defend a claim. The legal bill represents 40% of the deceased member’s super death benefits.
The deceased’s two adult daughters from his first marriage and his second wife disagree about who should receive the deceased’s super death benefits and who is responsible for the lawyers’ charges.
Family and superannuation lawyer Stephen Bourke, a director of Certus Law in Canberra, says this long-running dispute over death benefits should provide a telling warning to SMSF trustees.
Bourke believes that the ageing of the population and the massive exchange of wealth between generations means that such superannuation cases will become more commonplace with “vast amounts of estates consumed by legal fees”.
Before his death in 2010, Maxwell Morris had signed a binding death benefit nomination in favour of his two adult daughters from his first marriage in respect of all of his interest in the Morris Family Superannuation Fund.
Subsequently, the Supreme Court of Victoria upheld the validity of the binding death benefit nomination after its validity was challenged by the fund’s then corporate trustee, whose sole director was the deceased’s second wife. And the court ordered the SMSF to pay the $924,509 plus $289,917 in interest to his daughters.
But as reported by Super News Alert, published by Thomson Reuters, the SMSF’s assets had already been “significantly depleted”. This is because the now-replaced corporate trustee had already paid $329,605 to lawyers Piper Alderman (with claims for a further $160,000 in unbilled fees). An additional $41,530 more was paid to Piper Alderman for an expert report.
The adult daughters and the ultimate beneficiaries of any of his death benefits that can be recovered are now the replacement trustees.
In the latest development involving this SMSF, the Supreme Court of Victoria has just ruled that the fund’s current trustees (the adult daughters) have the standing to seek a review of the disputed legal costs paid by the fund’s former trustee.
SME owners can be particularly vulnerable to these types of disputes given their widespread enthusiasm for self-managed super.
And the cost – apart from any legal fees – can be particularly heavy for a family business because many SME owners hold their family business premises in their family self-managed funds. Bourke warns that dispute over death benefits could lead to the forced sale of SMF-owned business premises, perhaps throwing the future of a business into doubt.
Critical lessons for SME owners with self-managed super funds arising from such disputes include:
1. Aim for your intended superannuation beneficiaries to have control of your SMSF following your death
Bourke says the dispute over the distribution of death benefits in the Morris Family Superannuation case may not have occurred if the deceased’s adult daughters had been in control of the fund following his death. (As discussed, the daughters were the named beneficiaries in his binding death benefit nomination.)
Professional advice is worth considering on such factors as how to nominate a successor trustee if the SMSF has individual directors or a successor director if the fund has a corporate trustee.
2. Aim to foster excellent relationships within your family
“I always say to clients,” says Bourke, “that the best way to avoid disputes over estates is to have strong personal relationships within a family.”
3. Avoid nasty surprises
Bourke recommends that SMSF members call a family conference to discuss how they intend to direct their super death benefits. He believes that these meetings are particularly critical when there are “blended” families with children and possibly spouses from different relationships.
The meetings are intended to discuss the SMSF members’ plans for the distribution of their death benefits with the whole family. “Any ill-feeling that may be festering underneath should be brought to the surface,” says Bourke.
4. Try to avoid costly litigation
Bourke urges his clients to try to reach an out-of-court resolution of disputes over death benefits. Such settlements could prevent a large percentage of an individual’s death benefits being lost in legal fees.
5. Be aware that disputes over super death benefits rank among the most-common involving SMSFs
By understanding this, SMSF trustees are much more likely to put careful estate-planning practices in place for their super. In the Bourke’s practice, the highest number of SMSF disputes involves super death benefits followed by splitting of super following marriage breakdowns.