Putting Your Trust in Trustees

The SMSF trustee’s power to administer and control the assets of the Fund is regulated by the Superannuation Industry (Supervision) Act 1993 and the Superannuation Industry (Supervision) Regulations 1994.

The trustee deals with a deceased member's death benefits, with discretion to decide who to pay those benefits to if a deceased member did not leave a binding death benefit nomination.

The trustee could decide to pay the death benefit to someone you do not want to receive it, or to one of your children and not your other children.

This important question was discussed in the case Katz v Grossman (2005) NSWSC 934. Mr and Mrs Katz were each directors of the corporate trustee of their SMSF. They had two children and when Mrs Katz died the daughter (Mrs Grossman) replaced her as a director of the corporate trustee.

Mr Katz had signed a non-binding death benefit nomination in favour of the two children equally. However, when Mr Katz died Mrs Grossman appointed her husband as director of the corporate trustee in place of her deceased father. The directors then decided to pay the whole of Mr Katz's death benefit to Mrs Grossman.

Mr Katz Junior was very unhappy but could not overturn the decision as the trustees had a discretion as to who to pay the death benefit, and it did not matter that Mr Katz had signed a non-binding death benefit nomination, or had left his estate in his Will to be divided equally between his two children.

The lesson to be learned from this case is that it is crucial to have the right people as trustees of an SMSF and the right people as executors of your Will.

In order to attempt to ensure that this problem does not arise, it is crucial to include adjustment clauses in Wills, considering binding death benefit nomination and considering carefully who will make the decisions regarding your superannuation death benefit when you die.

In dealing with a deceased member's death benefit, it is crucial that only the member's legal personal representative (executor of their Will) may vote on any resolution dealing with a deceased’s super benefit. Normally, when a member dies, their legal personal representative is appointed as replacement trustee until the death benefit is paid, at which time, they must resign as trustee.

If the Trust Deed of an SMSF does not specifically say that the member's legal personal representative may vote on any resolution dealing with a deceased's super benefits then the Trust Deed should be amended.

In summary, if assets are held in a SMSF, it is strongly recommended that:

  1. The SMSF Deed be reviewed and amended where necessary, to ensure that the assets held in the SMSF are dealt with in a manner that reflects the Will maker’s wishes.
  2. Careful consideration should be given to whether it is appropriate to prepare a Memorandum of Wishes or Member Estate Plan, which the executor is directed to consider when making decisions regarding death benefits.
  3. The powers set out in the constitution of the corporate trustee be reviewed to ensure that the directors of the trustee company have a duty to comply with the wishes of the members of the SMSF.
  4. The Will of the members be reviewed to ensure that the executor is a trusted person who will ensure that the assets held in the SMSF are transferred to the people you wish to benefit. The Will should also include specific directions to executors concerning your SMSF assets and appropriate adjustment clauses in the event that one beneficiary receives more of your SMSF assets than intended.