How a landmark case is one of the most important in SMSF estate planning.
The plot could inspire a John Grisham novel: A husband sits in a cafe and, with two wait staff as witnesses, signs a Binding Death Benefit Nomination (BDBN) that leaves his superannuation to two daughters from a previous marriage.
He dies, and his wife – who is a trustee of their self-managed super fund (SMSF) – chooses to ignore the nomination and keep his share of the super. She instates her son as a trustee and seeks legal advice, and shortly after, her son is removed as a trustee and a corporate trustee structure adopted to pay out a reversionary pension – an action that, if initiated by her husband, would have ensured she kept the money.
The daughters sue and the wife uses the SMSF's funds to fight the battle. Ultimately, the daughters win the case and the wife, having lost her indemnity as a result of her actions, is ordered to pay the costs. However, before this can happen, she dies and her estate files for bankruptcy, leaving the super fund with almost $350,000 in losses.
“It's one case that covers every possible scenario that you want to cover,” says Simon Flowers, a partner at LBW Chartered Accountants, of the Wooster v Morris
case that has become one of the most important case studies in SMSF estate planning.
Flowers, who was the expert witness for the daughters – Sue Wooster and Karen Smoel –will be dissecting the saga and its implications for accountants at CPA Australia's SMSF Conference and Expo in July.
He says the case highlights a number of key issues for accountants when it comes to SMSF estate planning.
"The lesson that accountants need to learn is firstly that they need to have a discussion with their clients about estate planning – that's a major thing," Flowers says, adding that many clients don't truly understand how the structure of their SMSF works.
"Accounting is one of those things where you continually need to train your clients and make sure they understand what their structure is about."
He says sitting down with a client and discussing as well as documenting what their plans are for their assets when they die generally prevents most disputes. For instance, in the Wooster v Morris
case, Flowers says a simple meeting minute that documented the BDBN and that was signed by the husband, Max Morris, as well as his wife Patricia, would have likely prevented the whole situation.
"Obviously, we can't ask Max what his intentions were, that's why we like to have that conversation with clients before they die and have that document in place so we can actually look back and see what his thoughts were."
Flowers says the case highlights many other important issues for accountants, including whether trustees could fight a Binding Death benefit Nomination; if binding death benefit nominations overrule reversionary pensions; what trustees need to do on the death of members of the fund; and understanding who controls the purse strings.
As such, he says it is imperative that all parties involved – trustees, accountants, lawyers and financial advisers – must read the SMSF's trust deed, understand it and follow what it sets out.
Alia Parker is a finance journalist with more than a decade of experience spanning newspapers, radio and the wires on an international scale. When she's not writing about finance, she heads up The Australian Bicycle Route Project.