Bryce Figot says there are a number of issues to consider when determining appropriate trustee actions.
There has been some debate in self-managed super fund (SMSF) circles recently regarding binding death benefit nominations (BDBNs) and auto-reversionary pensions. The debate has hinged on a key question. The question is this: A BDBN might specify that upon death, a superannuation fund member’s benefits must be paid to their legal personal representative (estate). However, that member might have been receiving a pension. When the pension commenced, a term of the pension might have been that the pension automatically continues to be paid upon the member’s death to the member’s spouse. Accordingly, a conflict arises. Upon the member’s death, who is to receive the member’s superannuation benefits: their estate or their spouse?
This article seeks to set the record straight.
What is a BDBN?
The term “BDBN” – or binding death benefit nomination – refers to a direction (or “nomination”) made by a superannuation fund member to the trustee of the fund. The direction tells the trustee whom to pay the death benefits to. If validly made, the direction should be binding on the trustee. Effectively, it is a will for a superannuation fund.
There is no legislative right for a fund member to be able to make a BDBN. Rather, the member is only allowed to make a BDBN if the governing rules of the fund provide for it.
‘There is no legislative right for a fund member to be able to make a BDBN’
What is an auto-reversionary pension?
An auto-reversionary pension refers to a pension that was set up with a specific provision. That provision stipulates that upon the death of the pensioner, the pension continues to be paid (that is, “reverts”) to another person.
What is the relevant law?
There is no case exactly on point. Even if there were a case on point, it would only be of limited use. This is because such a case would be decided on the specific governing rules of the fund. These rules include the terms of the fund’s trust deed and any additional relevant documentation (for example, terms of pension documentation). Accordingly, any such case would be somewhat confined to the specific fund’s governing rules.
However, the starting point is this: trustees of trusts – including superannuation funds – cannot validly fetter their discretion. This is an odd proposition to many; however, it is clearly the law.
• Chesterman J, in Dagenmont Pty Ltd v Lugton [2007] QSC 272, provided a convenient summary of the position and the reasoning behind this rule. According to the Law of Trusts by Underhill and Hayton, 16th edition (p 690): “… it is trite law that trustees cannot fetter the future exercise of powers vested in trustees ex officio… . Any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.”
• Meagher and Gummow, in Jacobs’ Law of Trusts in Australia, 6th edition, para 1616 say: “Trustees must exercise powers according to circumstances as they exist at the time. They must not anticipate the arrival of the proper period by…undertaking beforehand as to the mode in which the power will be exercised in futuro.”
• Professor Finn (as his Honour then was) in his work, Fiduciary Obligations, wrote (at para 51): “Equity’s rule is that a fiduciary cannot effectively bind himself as to the manner in which he will exercise a discretion in the future. He cannot by some antecedent resolution, or by contract with…a third party – or a beneficiary – impose a ‘fetter’ on his discretions.”
• Finkelstein J summarised the position succinctly in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628 (para 121). His Honour said: “Speaking generally, a trustee is not entitled to fetter the exercise of discretionary power (for example, a power of sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In Re Vestey’s Settlement (1951) ChD 209. If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 ChD 447), though the trustee may be liable in damages for breach of contract …”
Accordingly, on its face, neither BDBNs nor auto-reversionary pensions are ever possible. This is because both would be a fetter of a trustee’s discretion. However, general law rules can be excluded by express provision in the fund’s trust deed – see Muir v Inland Revenue Commissioners [1966] 1 WLR 1269, 1283. For example, there is a general law rule that trustees cannot have a conflict of interest. This means that trustees cannot have self dealings. In turn, this would prevent trustees of SMSFs from selling assets to themselves personally, even if at arm’s length. However, if the trust deed allows for self dealings, such a sale is allowable.
Accordingly, both BDBNs and auto-reversionary pensions are theoretically possible, provided the deed of the fund allows for them.
How does this law often apply?
Every deed and every set of pension documentation is different. However, many “modern” SMSF deeds do have the following in common:
• a provision allowing a trustee’s discretion to be fettered by a BDBN; and
