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Financial planning, Investment and Self Managed Super Fund Article
Testamentary Trusts & Super Death Benefits
By Tony Crilly
1st July 2008
This article may be out of date.
1. Testamentary Trusts
Testamentary trusts afford several advantages over a will that simply distributes assets to beneficiaries. A testamentary trust will provide protection against spendthrift beneficiaries and creditors. It will also protect the primary beneficiary when they face the prospect of bankruptcy because the nature of the person’s occupation carries a risk of litigation. The pension entitlements are preserved and tax advantages are created particularly for beneficiaries who are minors and who otherwise would be taxed at a higher rate than that of an adult. Flexibility is also afforded to the beneficiary who may be given the discretion to continue the trust or to terminate it. The drafting of wills containing testamentary trusts is, therefore, more complex and should not be drafted in isolation without consultation with the individual’s financial planner and accountant.
Recently, I was asked to give advice concerning a will that established trusts for the testator’s four sons. One son had a history of substance abuse and money-making schemes that never seemed to eventuate and whose girlfriend failed to inspire confidence with the rest of the family. Two trustees were appointed to each trust; the eldest brother plus the beneficiary of the trust. The youngest brother was the co-trustee of the eldest brother’s trust. Beneficiaries within each trust were confined to the bloodline only. Two brothers were married with children; two were not. Complications arose when one son died before the mother’s estate was completely administered.
The executors of the mother’s estate, the eldest and youngest brothers, disagreed about how to distribute the unadministered estate to the deceased brother’s trust. No provision had been made in the will for the death of a co-trustee or the vesting (the ending) of the trust.
According to s.12 of the Trusts Act 1973 (Qld), when a trustee dies, the surviving trustee is not obliged to appoint a replacement trustee. In this case he refused to do so. The other co-executor of the mother’s estate wanted to be appointed as replacement co-trustee. Now, to add a twist to the situation, it was discovered that the deceased brother had removed funds from his trust without the consent of his co-trustee and had put them into a company created for the purpose.
The question arises: Do the funds in the company belong to the deceased brother's estate or to the trust? If the funds belong to the estate, then the funds should be distributed according to the deceased brother’s will which named the youngest brother as his sole heir. This situation resulted in multiple conflicts of interest. The youngest brother was the co-executor of the parent’s estate and the sole beneficiary of the deceased brother’s will.
The eldest brother was the co-executor of the parent’s estate and co-trustee of the deceased brother’s trust, which gave him the discretion to distribute this trust as he saw fit.
Negotiation to resolve the stalemate was refused; the only recourse was to apply to the Court. Regardless of the decision, the estate is diminished and the relationships between the brothers damaged.
A concisely drafted will providing for these contingencies would have prevented all the rancour and preserved the estate from unnecessary costs.
The expected outcome is that the Court will order the remaining sole trustee to continue administering the trust with the complete discretion previously exercised. The sole remaining trustee has indicated his intention to distribute the funds in the third trust to the surviving brothers and to retrieve and similarly distribute the funds in the company, in spite of the deceased brother’s will naming one brother as his sole beneficiary.
An ideal outcome would be that the Court orders the trusts to be terminated, with each brother in control of his inheritance.
2. Disputes over super death benefits
Superannuation and the assets of a deceased estate are regulated by different legislation; Superannuation Industry (Supervision) Act 1993 (Cth) and Succession Act 1981 (Qld) respectively.
Superannuation death benefits do not form part of an estate unless the deceased member of the fund has made a binding death benefit nomination to the trustee of the fund directing the benefits to the personal representative of the estate. This will also be the result if the member has no partner or children. Not all funds provide members with the option of making a binding death benefit nomination. At best, some funds provide the possibility of making a non-binding death benefit nomination. The trustee of the fund is given an indication of the member’s wishes without being bound by them.
The trustee of the fund has the discretion to pay the death benefits to those nominated by the deceased member, or to a “dependant” (as defined in the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994) that is, a spouse or a child under 18 and financially dependent on the member, or to the estate. The only recourse to overturn a trustee’s decision is to make an application to the Superannuation Complaints Tribunal.
With an estate, however, a deceased person’s spouse, child or dependant, who considers that adequate support has not been made for his or her proper maintenance and support, can apply to the Court for an order that provision be made out of the estate for their benefit. The Succession Act does not restrict applications for further provision to sons and daughters under 18 years.
Where a deceased’s largest asset is the superannuation benefit, applications may be required to both the Tribunal and the Court. While the results may be the same, the processes are quite different.
The Succession Act gives a six month window to give notice to the executor of an estate from the date of death of an intention to make an application for further provision from the deceased estate. The Act provides a further three months for the application to be filed in Court and served on the executor.
The de facto spouse of a member of a superannuation fund recently sought my advice on the deceased member’s estate. The deceased had been married and divorced prior to their meeting and there were three adult children from the marriage. There had also been a property settlement associated with the divorce. The deceased subsequently revised his will and nomination of the death benefits for his superannuation fund after the divorce, but he never updated them, even when he became engaged to his new partner.
The de facto spouse was widowed from her marriage, also had three adult children and owned the property in which the couple lived in her own name only. Due to its location and in spite of the large area, the property was subject to conservation and wild life covenants for development and subdivision is restricted.
The deceased’s major asset was the superannuation as he had remained with the same employer for over forty years. The de facto spouse had stopped working at the request of the deceased at the time he was made redundant and was the sole carer for the deceased when he was diagnosed with his illness. During the entire relationship, the deceased was also treated for depression as he had become estranged from his children from the time their mother had become a member of a particular religious group. Grandparents likewise became estranged from the grandchildren.
The de facto spouse made an application to the trustee of the superannuation fund for the death benefits to be paid to her rather than the adult children of the deceased. She was subsisting on a pension and the property required significant maintenance as it was sinking and cracking. As previously stated, the trustee of a fund which does not provide its members with the possibility of making a binding nomination, has absolute discretion as to the payment of the death benefits. The trustee could:
- uphold the non-binding nomination
- pay the death benefit to the de facto spouse as being the only dependant of the deceased member
- pay the benefit to the estate.
In the latter event, the de facto spouse is obliged to prepare a parallel application to the Court (the Supreme Court as the death benefit exceeded $250,000). The Succession Act gives a six month window to give notice to the executor of an estate from the date of death of an intention to make an application for further provision from the deceased estate. The Act provides a further three months for the application to be filed in Court and served on the executor. Therefore, it is inadvisable to await the decision of the Trustee of the fund, which can take several months, and, in the event of an unfavourable decision, then make an application to the Court. The de facto spouse must prepare both applications to ensure any likelihood of a satisfactory outcome.
The Court decided ultimately the discretion of the remaining trustee should not be disturbed and there was no compelling reason for the Court to interfere with his decision.
Tony Crilly F Fin is a solicitor of The Supreme Court Queensland and principal of Crilly Lawyers; Succession & Commercial Law. He lectures for Kaplan Professional and his team is located in Brisbane. Tony may be contacted at firstname.lastname@example.org
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