Almost all of us know someone who has argued over a Will, whether a family squabble during the testator’s life, or a full-blown Court action after a death. However, until recently a Testator could rest assured that various ‘asset structures’ would keep certain assets out of this quagmire – passing to whomever they chose. Since the introduction of the ‘Notional Estate’ principle into the model succession law in NSW, this is no longer always the case.
What is a ‘Notional Estate’ and a ‘Relevant Transaction’?
The Succession Act 2006 (NSW) states that property that has been the subject of a “relevant transaction” can fall within the deceased’s ‘Notional Estate’ for the purposes of a family provision claim.
A Relevant Transaction is one where property has changed ownership (by being transferred either to another person or to a trust) without full valuable consideration being given to the original owner.
Importantly, an ‘omission’ is sufficient to trigger a Relevant Transaction – this means that simply by not doing something (e.g. not making an election), the Testator may be taken to have entered into a Relevant Transaction.
The Relevant Transaction must have taken effect within 3 years before the date of the deceased’s death, on the date of death, or after the date of death.
All States and Territories, (except for South Australia), have agreed to adopt the uniform succession laws, which are based on the New South Wales model set out in the Succession Act. The uniform succession laws may be adopted by the States and Territories who participated in the project over the next few years. The 2008/2009 Annual Report of the Standing Committee of Attorneys-General states that the Ministers will advise their respective States and Territories on the extent to which they should seek to achieve uniform legislation in this area.
How does the Notional Estate principle affect superannuation?
Historically, super has been treated as separate to a person’s Estate. A deceased person’s super entitlement is paid as a “death benefit” by the trustee of their super fund – and this benefit has traditionally not passed through the deceased’s Estate (unless the death benefit was paid to the deceased’s executors). In New South Wales, this position changed with the adoption of the ‘Notional Estate’ principle.
In essence, the Notional Estate provisions expose super to potential claims under the family provision legislation. Instead of being virtually untouchable because of the rigidity of its own ‘nomination’ processes and eligibility criteria, super now falls squarely into the same category as cash, sole proprietor real estate and personal chattels. This is well-established in New South Wales, where the Court has ruled in several instances to deal with super in the context of a deceased’s notional estate. In one recent decision, it was decided that all of the deceased’s superannuation death benefits would be pooled into notional estate because the deceased had transferred all assets in his estate prior to his death to avoid giving anything to the children from his first marriage.
Alarmists are jumping up and down about the idea, because superannuation has, to date, been one of the most dependable and straightforward means of preserving assets for particular beneficiaries. If a client has an unruly child or estranged former partner, superannuation was seen as the ‘safe deposit box’ into which assets could be locked away, out of the reach of greedy fingers.
However, in an age where a significant portion of wealth is being funneled into superannuation and other trust structures, the policy of extending the notional estate principle to cover superannuation is not surprising.
To date, the uniform succession law model has not been adopted by other States and Territories outside of NSW, although many feel that it is only a matter of time. Which begs the question: how can we start preparing for the impact these new laws on our superannuation?
The ‘new’ superannuation structures
If superannuation is increasingly at risk, we need to start paying more attention to how better to protect it.
Self Managed Superannuation Funds
Self Managed Superannuation Funds (SMSFs) are one example of how you may gain a greater level of control over where your super goes when you die, although there are still restrictions placed on the creation and administration of these types of funds.
SMSFs require that every member of the fund is also a trustee of the fund, so that every person with a stake in the fund is able to participate in making decisions. If you do not make a binding nomination to the SMSF, it is up to the discretion of the trustees of the fund as to how to distribute your entitlements when you die (now known as the ‘death benefit’), provided the death benefit is distributed to a qualifying beneficiary.
Although an SMSF may provide you with a higher level of control over your super savings, the funds within a SMSF will still fall within the expanded definition of your notional estate under the model succession act.
One possible benefit of an SMSF is the ability to make non-lapsing binding death nominations. Public and private sector funds do not have the ability to offer non-lapsing nominations, and therefore a binding nomination must be made or renewed every 3 years. The problem with having to make a new binding nomination every 3 years is that the making of the nomination will constitute a Relevant Transaction – that will, by its very nature, fall within the 3 year period subject to review under the notional estate provisions. In contrast, a non-lapsing binding nomination within an SMSF may fall outside the 3 year review period.
Another way to try to further safeguard SMSF assets is by putting into place a ‘reversionary pension‘. A reversionary pension is exactly what it sounds like – it is a pension that is paid to you during your life but then ‘reverts’ to a nominated beneficiary upon your death. It is not yet apparent whether the Courts will be willing to determine that the reversion upon the testator’s death is a Relevant Transaction for the purposes of the notional estate provisions. The unreported case of Weekes v Weekes in the New South Wales Supreme Court (December 1992) suggests that the Court is willing (at the very least) to deem a commutation (meaning a conversion of a reversionary pension into a lump sum) by a nominated beneficiary to be a Relevant Transaction. In that case, though, the reversionary pension was paid from a public fund, and it is unclear whether an SMSF reversionary pension would have elicited the same decision.
Further judgments of the New South Wales Supreme Court may help determine conclusively whether reversionary pensions will jump over the notional estate hurdle.
Summary for SMSFs
In our view, the best means of protecting your SMSF assets from claims against your estate is to put in place a non-lapsing binding nomination, and consider a reversionary pension, in each case, at least 3 years prior to your death.
At the very least, you should ensure that your SMSF Trust Deed allows you to make a binding nomination that does not expire, and then (as early as possible) put in place a valid nomination of a person who is and will remain your superannuation dependant. To learn more about why you should think about what happens to your super after death, read this.
Industry (public) and private sector funds
SMSFs are not suitable or appropriate for everyone, and they do require that the founders have a certain amount of wealth (out of the reach of many). For the rest of us, there are still ways available to make sure your superannuation is less exposed under the new succession laws.
Previously, many people have been advised to ‘salary sacrifice’ and place large sums of money into their super funds. However, you should be aware that these additional contributions are able to be clawed-back out of super if the contributions are made within 3 years prior to your death.
Binding nominations offer some degree of protection, and are very persuasive evidence of a member’s intention. However, binding nominations are generally required to be renewed at least every 3 years (see section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (Cth) and regulation 6.17A(7) of the Superannuation Industry (Supervision) Regulations 1994 (Cth)). This means that the 3 year ‘clawback’ rule in the uniform succession law will allow the Court to make provision out of your super entitlements, because every 3 years when the nomination is renewed a Relevant Transaction will occur.
The important thing to note about maintaining a binding nomination is that, whilst it may not offer protection from the notional estate provisions, it will protect your superannuation assets from a challenge in the Superannuation Complaints Tribunal (SCT). The SCT cannot overturn a binding nomination in relation to a death benefit unless it is contrary to law (i.e. it is invalid or has expired, or the nominated beneficiary is found not to be a superannuation dependant of the deceased person).
Accordingly, the best way to safeguard your superannuation is to leave a binding nomination in favour of the beneficiary that the super fund trust deed and the Courts agree ought to receive it. This person (or sometimes people) is known as your ‘superannuation dependant’, and ought to be someone who you anticipate will be financially dependent on you at the time of your death. As such, your spouse, partner or minor child/children are the best choices.
Similarly, you can make enquiries of your fund provider to find out whether you can put a reversionary pension into effect. It is not clear whether this will entirely protect your superannuation assets from a subsequent estate claim, but it will make the argument more difficult for excluded beneficiaries.
Summary for public or private sector funds
In our view, the best means of protecting your public or private sector superannuation assets from claims against your estate is to make (and keep updated) a binding death benefit nomination in favour of your superannuation dependant. Whilst the need to update the nomination every 3 years will constitute a Relevant Transaction, the existence of the binding nomination will be persuasive on the Court as to your wishes.
Even if you don’t have an SMSF, it is still worth ensuring that your super is directed as you intend and putting in place updated estate planning documents. Let us help. Contact us on 1300 654 590 or email us.
Public or private sector funds:
- If you fail to make a binding death benefit nomination in respect of your superannuation assets, a decision of the fund trustee can be reviewed and overturned in the SCT;
- If you fail to make a valid binding death benefit nomination, it can be overturned in the SCT; and
- Any binding nomination that you make can be subject to review under the notional estate provisions – there is no sure-fire way to safeguard your superannuation assets under the Succession Act.
- Decisions relating to SMSF assets cannot be challenged in the SCT because SMSFs are not regulated funds. However, you should regularly review the situation of your fund (especially after marriage or divorce);
- A binding nomination that occurs within 3 years of your death will definitely be a Relevant Transaction for the purposes of notional estate provisions, but it may be the case that a non-lapsing binding nomination made more than 3 years prior to your death may fall outside the provisions;
- Reversionary pensions put in place may be effective – it is not yet clear whether the reversion of the pension upon your death to the nominated beneficiary is a Relevant Transaction; and
- Given the broad interpretation that the Courts have given to the notional estate provisions in the Succession Act, on a case-by-case basis the courts seem to be willing to deem almost any entitlement arising on your death to be a prescribed act for the purposes of section 22(4)(e).
The information contained in this post is current at the date of editing – 16 February 2023