Superannuation Death Benefits – Who Decides, and How to Challenge It

For many Australians, superannuation is the largest asset they leave behind – often larger than anything other than the family home.

What many find surprising is that superannuation does not automatically form part of a person’s estate.

People tend to think of superannuation as “theirs”. They have earned it, contributed to it, and watched it grow over many years.

It is therefore natural to assume that when you die, it will automatically go where you want it to – most often, to those who you have nominated to receive your residuary estate in your Will.

In many cases, that assumption is wrong.

Superannuation is not automatically part of the estate

When a member dies, their superannuation benefit (from then on called a “death benefit”) does not form part of the member’s estate, unless:

• the member has given the trustee a binding direction requiring them to pay the death benefit to their estate; or
• the trustee otherwise decides that the benefit should go to the deceased member’s estate.

In the absence of a valid BDBN, family members may be surprised to receive a letter from a trustee inviting them to make a “claim” on their loved one’s death benefit.

That surprise may turn into genuine alarm if the letter intimates that the trustee intends to pay the death benefit to someone outside the assumed beneficiaries.

Who can receive a death benefit?

Like the trustees of all trusts governed by a written instrument, a superannuation fund trustee’s most important duty is to observe the terms of the trust deed: Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15.

The trust deed will almost certainly say to whom the deceased member’s death benefits must be paid, even if only by reference to the persons able to receive death benefits under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS) and Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR).

Reg. 6.22 of SISR says that a member’s death benefits may only be paid to one or more of:

• the member’s legal personal representative; and
• the member’s “dependants”.

Section 10 of SIS then says that:

• the dependant of a member includes the member’s spouse; the member’s child; and any person with whom the member was in an interdependency relationship; and
• “spouse” includes “another person who, although not legally married to the person, lives with the person on a genuine domestic basis in a relationship as a couple.”

The definition also includes someone who is a “dependant” within the ordinary meaning of the term.

Decisions of the Australian Financial Complaints Authority (AFCA) and the (now-defunct) Superannuation Complaints Tribunal have resulted in some surprising examples of dependant:

• estranged spouses (i.e. legally married but separated for many years);
• former de facto partners;
• parents;
• siblings;
• grandchildren;
• nieces and nephews; and
• flat mates.

There is no automatic entitlement within the deceased’s dependants. The spouse does not rank ahead of others as a matter of law; nor does the estate.

If there is no BDBN then the trustee must identify the people eligible to receive a death benefit, and then decide among them who should receive it, based on such factors that the trustee thinks appropriate, having regard to the fund’s trust deed.

Most trust deeds give the trustee a broad discretion to decide:

• who within the class of eligible recipients should receive the benefit; and
• in what proportions.

Whilst this discretion is often described as absolute, the trustee must still:

• act honestly;
• act in good faith;
• exercise the power for a proper purpose; and
• give real and genuine consideration to the decision (which may include making enquiries as to the financial circumstances of all relevant beneficiaries).

What can go wrong

You may be reading this having recently become all-too-aware of what can go wrong: a trustee has made a death benefit determination you consider unfair or inappropriate.

Because there is no minimum period of time that people must live together to satisfy the definition of “spouse” (as there is in other legislation, such as (for example) the Administration Act 1903 (WA), which requires a minimum period of 2 years before a de facto spouse can share in the estate of a person who died without a will), trustees have made decisions which on their face go considerably beyond what most ordinary Australians might think reasonable or fair.

We are aware, for instance, of trustee determinations that have awarded death benefits to “spouses” who cohabitated for less than a month.

Similarly, the parents and siblings of a deceased fund member have been dismayed to learn that a fund trustee has decided to pay death benefits to an estranged spouse, to whom the deceased remained legally married, but who they had not seen for over a decade.

Challenging the decision

Aggrieved beneficiaries of SMSF members must pursue the matter privately (i.e. in Court).

For large, APRA-regulated funds, SIS requires trustees to maintain internal dispute resolution arrangements under which beneficiaries can complain and obtain written reasons.

Within 28 days of making a death benefit decision, a trustee must give notice of the decision to each person who they believe, after reasonable enquiries, may have an interest in the death benefit.

To make a claim, a person must have an interest in the death benefit.  This generally means that the person must be a dependant, or would be entitled to some or all of it under the deceased’s will.

A person dissatisfied with a trustee’s decision may object to it by applying to AFCA within 28 days of receiving notice of the decision.  The fund trustee is required to take reasonable steps to cooperate with the AFCA process.

AFCA may direct that a conciliation conference be held. Generally, it’ll be held by telephone, with the persons present being the “competing” claimants, and representatives of the fund’s trustee.

The matter can be referred to the Federal Court (if it involves a determination of a complex question of law, for example), either of AFCA’s initiative, or at the request of a party.

Otherwise, AFCA must:

• affirm the decision;
• vary the decision;
• set the decision aside and send it to the trustee to reconsider in accordance with directions or recommendations; or
• set the decision aside and substitute its own decision.

Is there an order of preference for claimants?

The Court has on occasion agreed that the spouse of a deceased member should be preferred over the interests of others (Ievers v SCT [2016] FCA 936).

AFCA’s stated policy is that:

The purpose of a superannuation death benefit is to provide for those dependants of a superannuation fund member who would have continued to rely on the member for financial support, but for the member’s untimely death. Subject to the requirements of a fund’s governing rules and legislative requirements, in allocating a superannuation death benefit among the member’s dependants, preference is given to those dependants who might have expected to continue to receive financial support from the member.

However, the issue is far from clear.

More recently, the Court has said that a trustee must not prefer the interests of some types of beneficiary (i.e. a spouse) over others, in the absence of a direction to this effect in the fund’s trust deed.  In Wan v BT Funds Management [2022] FCAFC 189 the Court said (with emphasis):

For reasons I shall discuss further below, in my opinion, the Trust Deed does not constrain the exercise of the Trustee’s discretion such that the deceased’s superannuation death benefits should be prima facie paid to dependants as opposed to the deceased’s legal personal representative.

I do not accept that when AFCA comes to assess whether a trustee’s decision to affirm a non-binding nomination is fair and reasonable, it should give preference to the interests of a complainant who was a dependant of the deceased.

[There is no] presumptive preference for the payment of dependants.

It is not sound as a matter of principle or analysis to distil from the outcome of particular complaints a principle to the effect that some form of preference should be given to a complainant who establishes that he or she was in dependency relationship.

Conclusion

In practical terms, then, the position is:

• Superannuation sits outside the estate unless steps are taken to bring it in;
• In the absence of a valid binding nomination, the outcome turns on the trustee’s discretion, exercised within the context of the statute and the general law of trusts;
• The starting point is always the trust deed; and
• Claimants must act quickly if intending to challenge a death benefit distribution decision they consider unfair or unreasonable.