Below is an excerpt from the recently released Complete Guide to SMSFs: Planning for Loss of Capacity and Death title, now available from the CCH Bookshop.
The recent decision of Wooster v Morris  VSC 594 is a very significant case regarding SMSF succession planning.
Given the critical importance of this decision, it is worthwhile considering it in detail, and this Chapter is dedicated to that consideration.
The key message of the case is that the most important issue in SMSF disputes is the identity of entity holding the “purse strings” of the SMSF upon death or loss of capacity.
The deceased (Mr Morris) had two adult daughters from a previous marriage (Mrs Wooster and Mrs Smoel, ie the plaintiffs). He also had a second wife, Mrs Morris.
The deceased and Mrs Morris were the only members and trustees of an SMSF.
In March 2008, the deceased made a binding death benefit nomination (BDBN). The BDBN was in favour of the plaintiffs in respect of all of his interest in the SMSF.
The deceased died in February 2010. His interest in the SMSF was $924,509.
Probate of the deceased’s will was granted to the plaintiffs (ie the plaintiffs were the deceased’s executors).
After the deceased’s death, the surviving trustee (ie Mrs Morris, the step mother of the plaintiffs) was left running the SMSF. Mrs Morris had a son from a previous relationship and Mrs Morris appointed him as her co-trustee.
Later on, the trusteeship of the SMSF was changed to a company called Upper Swan Nominees Pty Ltd. Mrs Morris was the sole director and shareholder of Upper Swan Nominees Pty Ltd.
For reasons not mentioned in the judgment, the trustee decided that the BDBN was not binding. Instead, Mrs Morris, as sole director of the trustee, decided to pay none of the deceased’s death benefits to the plaintiffs but instead she decided to pay all the death benefits to herself.
The plaintiffs issued court proceedings seeking declarations that, among other things, the BDBN was valid and binding.
The parties agreed that this question be answered by a “special referee”, rather than the court.
The special referee found in favour of the plaintiffs, holding that the BDBN was valid and binding and that the plaintiffs were entitled to be paid $924,509 plus interest.
However, the trustee’s legal fees in defending the claim were “substantial” and had “been paid only from the accounts in the name of the deceased”. For example, the court mentioned that the draft financial accounts for 2013 record legal fees of $302,699 and accounting fees of $43,560.
The trustee and Mrs Morris (ie the defendants) argued that the plaintiffs should be paid only out of the deceased’s interest in the SMSF.
[¶2.4] Question for the court
The court considered a number of questions. One question was what was available to be paid to the plaintiffs: was it limited to only what the deceased had in the SMSF, or could the plaintiffs also access Mrs Morris’ interest in the SMSF, or her personal assets?
The court held that:
“As a consequence of the decisions of Mrs Morris, if the defendants claimed an indemnity from the [SMSF], they would bear only a small portion of the financial consequences of the litigation, despite being entirely unsuccessful. Rather, the loss would be borne almost entirely by the plaintiffs in the depletion of their interest in the [SMSF].”
The court declared, among other things:
- all moneys held by the SMSF (including Mrs Morris’ member accounts) were available to meet the payments, and
- the trustee and Mrs Morris personally were jointly and severally liable to pay all outstanding money.
[¶2.5] Lessons for practitioners
Wooster v Morris contains many vital lessons that all SMSF practitioners must be aware of.
(a) Lesson 1 — LPR does not automatically become a trustee
Wooster v Morris clearly dispels the myth that when a person dies, their executors (legal personal representatives (“LPRs”)) automatically become a trustee in the deceased’s place. Here, the plaintiffs were the deceased’s executors but they did not become trustees.
Rather, the identity of trustee upon death is determined by the trust deed of the SMSF. Therefore, it is critical to consider whether the deed appropriately distributes the power to appoint a trustee upon death or loss of capacity.
For more information in this regard, see ¶8.3 and ¶10.2(a).
(b) Lesson 2 — BDBNs are only a partial solution at best
Another myth dispelled by Wooster v Morris is the idea that SMSF succession planning is completely handled by making a BDBN. In Wooster v Morris, the deceased had made a valid BDBN but the plaintiffs still had to spend years in legal battles to obtain their money. Even then, in a subsequent decision, the judge noted that (Morris v Smoel  VSC 31 at ):
“To the extent that the [plaintiffs in Wooster v Morris] are unable to recover the amount due to them from the Morris Family Superannuation Fund, the shortfall was ordered to be paid by the estate of Mrs Morris. For the reasons set out below, the shortfall will not be recovered by the [plaintiffs in Wooster v Morris].”
Accordingly, an adviser cannot simply tell a client to make a BDBN and then merely expect that the right people will simply and easily receive all of their superannuation death benefits.
This leads into the most important lesson from the case.
(For more information regarding BDBNs, see ¶13.4.)
(c) Lesson 3 — critical issue is the identity of the entity holding the “purse strings”
Wooster v Morris clearly demonstrates that far more important than any BDBN is the identity of the entity controlling the “purse strings” upon a member’s death or loss of capacity. As stated above, this depends to a very large degree on the provisions of the trust deed of the SMSF. It is recommended that deeds are carefully drafted to ensure sensible outcomes, for example, that the “minority” surviving member(s) does not wield an unfair amount of power upon death.
The 11-step approach set out in this publication emphasises the importance of ensuring that the right people control the SMSF. Remember that many SMSF death benefit cases involve disputes regarding who is the trustee (ie who is holding the “purse strings”). See, for example, Katz v Grossman  NSWSC 934, Moss Super Pty Ltd v Hayne  VSC 158 and Ioppolo v Conti  WASCA 45.
The Complete Guide to SMSFs: Planning for Loss of Capacity and Death assists practitioners to assess each of their clients’ SMSFs to identify problems that may arise and the practical steps that need to be taken to ensure any potential problems can be avoided or dealt with. Get your copy today!