When Francesca Ioppolo married Augusto Conti they were not twenty-somethings, dazzled by the theatre and excitement of a wedding. They were both mature adults and in fact Francesca already had four children from her first marriage.

In 2002 the happy couple set up their own self managed superannuation fund and Francesca signed a form giving her superannuation death benefits to Augusto. In 2005 Francesca made a Will where she said she wanted her super benefits to go to her children and specifically not Augusto.  In 2006 she signed another form giving those benefits to Augusto again. 

Why had she changed her mind again, particularly given how forceful she had been in the Will?  Did her solicitor and her financial planner not know of what the other was doing? Maybe she just didn’t think too closely about it. Maybe she didn’t understand what she was signing.  Maybe she just didn’t remember what she’d put in her Will. 

Sadly Francesca passed away in 2010. Her son Rosario and her daughter Grace were the executors of her estate.  But her widower Augusto became the sole trustee/director in charge of that super fund. Her children expected to get her super benefits under her Will.  How disappointed were they when Augusto took all of Francesca’s death benefit: $648,586?  Her children got nothing from her super fund benefits. The court refused to change the outcome.

This story highlights a number of basic things that you need to think about if you have your own private (self-managed) super fund when it comes to your estate planning.  But before we list some of those things we need to get straight just how your estate planning and your super fund work together – or in some cases, don’t.

Your self-managed super fund, or SMSF for short, is a trust. What’s a trust? Simply put, a trust is a relationship between two different people (or companies) where one person holds assets on behalf of another (there are some finer details but let’s not worry about them for current purposes).  The terms of the trust can be oral or written, but in the context of Australian superannuation law must be written.

So, your SMSF trustees (which must be all the members of the fund personally or all those members as directors of a company) hold each member’s benefits on trust for that particular member.

The whole point of a trust is that the person for whose benefit the assets are held, the beneficiary, isn’t the owner of those assets.  The trustee is. If the beneficiary doesn’t own the assets they can’t gift them in their Will.  And so it is that you cannot gift your super benefits in your Will because you don’t technically own them – the trustee of your fund does.

But that doesn’t mean you can’t control what happens to them on your death, especially when you have your own self managed super fund.  You do this through a form of the kind that Francesca signed, called a ‘death benefit nomination’, which can be binding, so that the trustee must do what you say, or non-binding, so that they need only take into account what you say before making their own decision.

So, rule number 1 – make sure you have a death benefit nomination in place and that the directions you give to your trustee in that nomination form fit with what is intended to happen with your other property that is not in your super fund. You must also decide whether the nomination is binding (probably preferred in most cases) or not.

You may be asking: if Francesca filled out several death benefit nominations why did the trustee have the power to ignore them?  The court ruled that both her nominations had lapsed.  Why they lapsed we’re not sure because the case notes don’t tell us.  But the fact that they lapsed highlights the second important thing to note about dealing with your SMSF.   

Your self-managed fund was created by and is governed by a deed that you sign when setting up the fund.  That deed is the fund’s constitution, birth certificate, rule book, instruction manual, bible, the lot.  There are plenty of laws governing superannuation but the deed is where the fund and its trustee get all their powers.  Most of the laws say what the fund can’t do or what the fund might be permitted to do.  Very few of those laws give the fund the actual power to do things. Never under-estimate the importance of the fund’s deed and always make sure it is regularly updated.

Your death benefit nomination form must be in accordance with the fund’s deed.  So here comes rule number 2: always check your trust deed to make sure that the form of your nomination, and the way it is signed and processed, follows to the letter what is said in the fund’s deed.

Now that we understand the two basic rules of estate planning and self-managed super, let’s consider the sorts of things that should inform your thinking when you come to consider what to do about your assets on your death.

In a sense we’ve already covered the single most important thing to consider – ensuring that those who survive you do what you want with your assets, super and non-super.  Through probably no fault of her own, Francesca failed to ensure this happened.

As we’ve seen, the way to do that is through a carefully and effectively prepared death benefit nomination form.

But preparing death benefit nominations is not simply form-filling.  The details are vitally important and can only be finalised as part of your whole estate plan. Blindly stating that all your death benefits go to your spouse may be totally the wrong thing to do when viewed against what you could have achieved if you’d received good estate planning advice.  So don’t fill out the death benefit form without thinking it through very carefully; especially about how it fits your other estate planning.

Returning to the major concern of ensuring your wishes are followed, two matters need to be covered off. 

The first is that if you have a company as the trustee of your SMSF you need to ensure that the directors of that company after your death will protect your wishes.  If Francesca had been able to appoint one of her executors as director of the corporate trustee of her SMSF that person may have been able to ensure that the death benefits went where she wanted.

The second is to ensure that if you appoint an enduring power of attorney you state clearly that the attorney does not have the power to change your death benefit nomination.  The attorney could only do that while you are alive, but if you lose mental capacity in the lead up to your death an thoughtless or unscrupulous attorney could take advantage of their power in that way.

What other matters need you to watch out for?

• Your death benefit nomination is not automatically revoked by divorce so you need to do something about it as soon as possible if your marriage breaks down.

• There are only certain sorts of people who can receive benefits from your super fund and even fewer who can do so tax free.  Think about that when working out who should get your non-super assets and who should receive your super benefits.

• Do you want to create a pension for your surviving spouse rather than give them a lump sum so that the assets are shielded from a surviving spouse’s later marriage and could eventually be available for your children?

• What happens if your spouse dies before you?  Does your death benefit nomination cover that contingency by appointing the substitute beneficiaries and ensuring, as much as possible, that the tax issues are minimised?

• Do you need to work out how you will give equal shares of your estate to the kids when you want to provide one child with a particular asset (eg. the family farm or business) and the other with your super benefits.  The tax payable in respect of the super may result in that child receiving much less than expected and less than your other child.

• If your spouse or children are in high risk jobs (eg. professionals like doctors, lawyers etc) can you protect their inheritance through careful use of the super benefits including making them members of the fund?

• Is your spouse or any of your children vulnerable in some way due to mental issues, substance abuse, estranged or dysfunctional marriages?  Making them a member of the fund or giving the super benefits to a testamentary discretionary trust through your Will might help to protect their inheritance.

Francesca’s story carries an important message for all of us that your will and your SMSF can work together to give you and your family the very best outcome after your passing.

But if you don’t ensure that they know about each other, and are prepared with common goals in mind, they may have disastrous consequences resulting in some very unhappy family members, effectively undermining your best intentions of making life a little easier for those you leave behind.

Peter Townsend, principal, Townsends Business and Corporate Lawyers