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Many binding death benefit nominations built on non-law firm websites don’t work
The Court looked at a binding death benefit nomination Re Narumon Pty Ltd  QSC 185. It confirms:
- that many Binding Nominations are faulty (but not for the reason we all thought);
- that it is safer to use a law firm’s website to build SMSF Deeds and Binding Non-Lapsing Death Benefit Nominations (Binding Nomination); and
- those Binding Nominations prepared on non-law firm websites are not protected by law firm Professional Indemnity insurance.
The peculiar case of Narumon  QSC 185
John Giles starts an SMSF. John dies aged 80. He is survived by:
- his second wife (married 19 years)
- Nick – his child from his second wife (16 years old)
- four children from his first wife (one of his children is challenging his Will, but it only has $200k in it, but that is another story)
- his sister (sides with the second wife)
The second wife ends up as the sole director of dead John’s SMSF trustee company.
John’s superannuation had $4m:
- $1m – accumulation account; and
- $3m – lifetime complying pension.
John appoints his second wife and his sister to hold his Power of Attorney. Later that year he loses mental capacity.
John’s latest Binding Nomination states:
- 47.5% to the second wife
- 47.5% to his son Nick (from second marriage)
- 5% to his sister (that is a bit strange since his sister is not a ‘dependant’ under the superannuation law).
The latest Binding Nomination ceased after three years. By that time John had lost mental capacity. John couldn’t sign a new Binding Nomination.
What went wrong in Narumon?
John’s SMSF Deed is prepared in 2013. However, it strangely required that all Binding Nominations expire after 3 years.
Is that the law?
Sadly, the non-lawyer that prepared the SMSF Deed had only considered the legislation. The non-lawyer had not seen the latest Court cases.
What the legislation states
* Regulation 6.17A Superannuation Industry (Supervision) Regulations 1994 (Cth); and
* section 59(1A) Superannuation Industry (Supervision) Act 1993 (Cth) (‘SISA’).
The legislation states that superannuation funds are bound by a Binding Nomination.
However, this is subject to Regulation 6.17A(7). This Reg states that a Binding Nomination expires after three years.
But what do the recent cases say?
Look at Munro v Munro (2015) 306 FLR 93. It states that section 59(1A) SISA and Regulation 6.17A don’t apply to SMSFs. Judge Bowskill in Narumon confirms this. “I agree with Mullins J’s conclusion in Munro v Munro at -, that s 59(1A) of the Act does not apply to a self-managed superannuation fund” para 35.
Section 59 states:
“(1) Subject to subsection (1A), the governing rules of a superannuation entity other than a self-managed superannuation fund must not permit a discretion under those rules that is exercisable by a person other than a trustee of the entity to be exercised…
SMSFs can have Binding Nominations that live forever.
Bizarrely, the SMSF Deed needlessly introduced the three-year expiration condition from Regulation 6.17A.
We see this often. Many non-law firm websites use badly drafted or out of date SMSF Deeds. The lawyers that handed over the template have long gone. Or there is no lawyer, to begin with. Even if there is a law firm providing the template, there is no law firm professional indemnity insurance applying to the template. In contrast, Legal Consolidated is a law firm. Our law firm Professional Indemnity insurance applies to every document you build on our website.
As a lawyer, I have sold over 18,000 SMSF Deeds online. Had John built his SMSF Deed on our law firm website his Binding Nomination never expires.
Can a POA valid a Binding Nomination? The second wife and sister plot and plan
John’s second wife is frightened. She now knows that she and her son Nick are going to miss out on $4m. The second wife and John’s sister turn to John’s POA. Can they use the POA to freshen up the 3-year Binding Nomination?
The Court held that the document signed by John’s enduring attorneys was a valid Death Nomination. The Court noted it merely confirmed what John had said in the Death Nomination.
Later it was noted that the sister was getting 5% of John’s superannuation. But the sister was not a ‘dependant’ under the Superannuation rules. The sister didn’t want to money anyway. So the second wife and John’s sister used the POA a second time. They signed, on John’s behalf, a Binding Nomination 50% to the second wife and 50% to her son. All they did was to take the sister’s 5%. And the sister was happy with that. However, the Court found that the new Binding Nomination by the attorneys was invalid. It was a “conflict transaction” under the Powers of Attorney Act 1998 (Qld). It therefore required authority from John. (John is of unsound mind so that can’t happen.)
So it comes down to what is in the SMSF Deed and the relevant state POA. It is still a mess and the law remains uncertain. This is so often the case when Federal Law (SMSF) meets State law (POAs).
To find the full answer to this question just start building any Enduring Power of Attorney here.
For free advice on building any of our documents please contact us.
Adjunct Professor, Dr Brett Davies, CTA, AIAMA, BJuris, LLB, LLM, MBA, SJD
Legal Consolidated Barristers and Solicitors
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