Worried about protecting self-managed super fund (SMSF) assets once you are gone? While SMSFs can be effective estate planning and wealth protection tools, sibling rivalries and acrimony among family members can potentially threaten even the best laid plans.

The widely reported NSW case of Katz v Grossman (2005) highlights the risks involved. Before his death, Ervin Katz made a non-binding nomination seeking to divide his $1 million SMSF estate equally between his son and daughter.

Yet since his daughter controlled the SMSF, she ignored the nomination and distributed all the benefits to herself, an action that even a court challenge from her brother failed to reverse.

In another case, Ioppolo & Hesford v Conti (2013), the deceased (Francesca Conti) stated in her will that all her super entitlements should go to her children, with none to her husband, Augusto.

However, following Francesca’s death, Augusto retired as a trustee and appointed a corporate trustee controlled by himself as the new trustee. The new trustee paid all Francesca’s death benefit to him.

Francesca’s executors, her son and daughter, challenged the trustee’s decision but failed, resulting in a substantial financial and emotional cost to the children.

With the increasing prevalence of blended families, undertaking the necessary estate planning is crucial to guard against potential legal challenges, according to legal specialists.

“I often have married couples come to me where one has been divorced and has children from the first marriage who tell me they have done their own ‘estate planning’ by taking steps such as ensuring property is held by the spouse that hasn’t been divorced,” said Cathy Russo, managing principal lawyer, Macpherson Kelley.

“This can actually make the situation worse because it ignores that stepchildren are within the range of potential claimants and will likely contest the stepmother’s estate if she received assets they considered were rightfully theirs.”

Russo said a number of parties can challenge a will, including the spouse, de facto spouse, children including stepchildren and dependents generally, “even if they’ve had no prior contact with the parents and dependents generally.”

“If they apply for what is called family provision, the courts will decide whether the deceased made adequate provision for the applicant and can potentially order a sum to be paid to the applicant.”

In such a scenario, courts consider a range of factors including the applicant’s financial position, any physical, intellectual or mental disability, the estate’s size, contributions made by the applicant to the estate or welfare of the deceased, the relationship with the deceased and their wishes.

“It’s not a black and white formula … so if there is a potential contested estate, you are best to put in place effective techniques to ensure as few assets as possible fall into the estate, something you can easily do with a SMSF,” Russo said.

Protecting assets

“Probably the most effective tool is a properly drafted binding death nomination. Under this nomination you can bind your trustees to distribute to your desired beneficiary in whatever percentages you require,” Russo said.

“You can even provide for what we call ‘cascading’ nominations in the event your first preferred beneficiary does not survive you. If you bind your trustees in this way, it ensures that your death benefits are paid directly to those persons and are not ‘run’ through the estate and liable to claims.”

As seen with the Katz case, the alternative scenario could prove costly, Russo warns.

“Without a binding death nomination, trustees generally have absolute discretion on who they can pay your benefits to within a broad range of dependents that includes stepchildren and other potentially unintended beneficiaries,” she said.

“We have a standard checklist we go through with an estate plan—it’s absolutely critical you get that binding death nomination in place.”

Nominations must strictly comply with SMSF legislation and the trust deed to be valid. Common errors include

  • failing to complete or sign the form correctly
  • failing to nominate beneficiaries that are eligible to receive benefits
  • failing to comply with the trust deed
  • and allowing nominations to lapse without being renewed

Notably, SMSFs can provide for non-lapsing nominations, Russo said.

“We recommend SMSFs work with financial advisers as well as lawyers in preparing the nomination, as it’s important to get the best tax consequences for the beneficiaries in receiving the death benefits,” she said.

SMSF specialist adviser Liam Shorte points to the benefit of nominating a “reversionary beneficiary” for a pension, particularly for couples in a blended marriage.

“A reversionary beneficiary nomination is a great estate planning tool as it provides certainty (subject to eligibility and proper documentation) as it means the pension of the deceased does not actually stop and the reversionary pensioner does not have to wait for the trustee to make a decision regarding the member’s pension,” said Shorte, director at Verante Financial Planning.

“Put simply, the member’s pension automatically becomes payable to the reversionary beneficiary immediately upon the member’s death.”

He adds: “The beauty of SMSFs is that you can have numerous pensions and have different beneficiaries for each of them, even though you are pooling the investments during your lifetime.”

Shorte also recommends using non-lapsing binding death nominations, such as in directing SMSF pension funds to adult children, including those from a previous marriage.

However, he notes it is “really important to read and understand the powers under the deed of the specific fund to put a valid nomination into force.”

Shorte advises to be ultra-careful when making such nominations, including potential DIY errors, given the potential risks.

“Prepared nominations and pension kits have errors that a lawyer for the challenger can pick apart in court,” he said.

“Take the time to really understand the requirements of your SMSF deed and the powers provided to make nominations—check and double check the wording before signing off on the final draft.”

With SMSF assets continuing to rise and the growing potential for legal challenges, putting the right steps in place can minimise the risk of costly disputes while ensuring the best possible financial outcomes for beneficiaries.