Whatever Happened to Baby Jane? The Addams Family. The Lion King. The Godfather. Sibling rivalry – it’s a classic, rich plot line for countless books and movies, and a dynamic in millions of ordinary families around the globe.
When parents die, sometimes that rivalry fades and other times, it’s the moment that reignites a tension that has simmered for years. When money is thrown into the mix, it’s a recipe for family flambé. Just Google ‘siblings fight over inheritance’ – there’s plenty of material.
Ervin and Evelin Katz were an ordinary couple living in New South Wales with two children, Linda and Daniel. Their wishes for their estate, when they were gone, were simple: when they died, their estate assets were to be split 50/50 between their children. In Ervin and Evelin’s case, this included their self-managed superannuation fund (SMSF) of which they were the co-trustees during their lives.
When Evelin died in 1998, Ervin made Linda a co-trustee of the SMSF to satisfy the Australian Taxation Office’s rule that an SMSF have at least two co-trustees. When Ervin died five years later, Linda made her husband, Peter Grossman, the co-trustee – putting the SMSF entirely under the couple’s control.
Despite her parents’ wishes that their children receive equal amounts of the inheritance, a wish that Ervin did not waver from during his life, Linda and Peter used their power as co-trustees to pay Linda approximately $1.2 million of her father’s death benefit from the SMSF directly, instead of pooling it into the estate.
The problem was that Ervin had expressed his wishes as a non-binding nomination. A non-binding nomination is precisely that – non-binding; it is a guide for the co-trustees and not a directive. This meant that in the case of Ervin’s SMSF, Linda and her husband had complete discretion as to whether to follow his wishes; share the entitlements with another person (as long as they are a dependant for superannuation purposes, as Daniel is); or pay the entitlement to the estate.
The alternative that many people will be familiar with is the ‘binding death benefit nomination’ (or BDBN). A BDBN obliges the trustee of a super fund (including co-trustees in the case of SMSFs) to pay the death benefit as instructed. BDBNs need to be renewed every three years – but in the case of an SMSF, they can be renewed every three years, or written into the trust deed for longer period. Keeping it up-to-date is essential to ensuring it is valid and binding on the trustee.
Notwithstanding the ethical or moral judgements that may be made about her actions, in 2005 the Supreme Court of New South Wales found that Linda did technically have the right to pay the death benefit to herself. Ervin had unwittingly left his son Daniel powerless to claim his share of the benefit.
This case – Katz v Grossman – has gone to become something of a classic reference in estate planning law about the consequences of not getting the details in an estate plan right.
So what could Ervin have done to prevent such an outcome? One option would have been to have made sure he left a BDBN on his SMSF, nominating his children equally. This would have meant his direction on the death benefit payment would have been binding. A second option – particularly if he had any uncertainty about how his children would get along after he was gone – would have been to appoint a professional trustee, leaving both a BDBN nominating his Legal Personal representative as well as instructions in his Will on how his estate was to be divided, thus providing a secured entry point between the fortune he was leaving behind, the long-held wishes he shared with his wife as to what would happen with their legacy, and his children.
With more than one million Australians now keeping their superannuation in around 600,000 SMSFs, Katz v Grossman provides some important pointers for those with superannuation, especially those with SMSFs and children who might not behave quite as they did under their parents’ watchful eye.
Read the full judgment here.
This article was written by Nick McColl, Estate Planning Solicitor, Trustee & Wealth Services.
If you have any questions about any other estate planning or estate management issues raised by this article, please contact us.
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