Self Managed Super: Issue 48

The next death dispute frontier

Capacity issues are becoming an increasing concern in SMSF estate planning, raising questions about how disputes will be handled as the sector evolves. Todd Wills explores the growing impact of mental capacity challenges, recent legal precedents, and what it means for the future of superannuation planning.

According to the latest ATO data, more than one-third (38 per cent) of members in Australia’s $1 trillion SMSF sector are aged 65 or older. While death is often a challenging topic to discuss, the reality is many of those members may pass away without completely drawing down on their superannuation savings.

The financial implications are likely to be significant. A cursory glance at the Treasury-led “Retirement Income Review” reveals the total value of superannuation death benefits was estimated at about $17 billion in 2019, with an average benefit of $190,000 per member. However, by 2059, this figure is projected to rise to around $130 billion, with average death benefits exceeding $480,000 per member.

Superannuation interests cannot typically be included in a will as they are held in trust. As a result, many individuals use death benefit nominations to specify beneficiaries directly. While this mechanism aims to simplify estate planning and ensure super assets are distributed according to the member’s wishes, it is certainly not without its flaws. Without a death benefit nomination, the decision on how to distribute these assets falls to the superannuation fund’s trustee, which can lead to disputes among potential beneficiaries. Even when a death benefit nomination is in place, ambiguities or legal challenges can arise and are currently increasing in number. As the SMSF sector matures and super balances grow, the stakes are higher than ever before.

The next frontier

At this year’s SMSF Association Technical Summit held in Sydney, Cooper Grace

Ward partner Scott Hay-Bartlem spoke of a new threat that has emerged in these disputes.

“In terms of death benefit disputes, we’re seeing a number of these transactions now being things that we fight about. Even when you’re doing things right, there can be flow-on effects,” he explained.

“We often ask does your binding death benefit nomination (BDBN) stipulate dependants and do you comply with the deed? But we have to take a step back. The disputes are getting more sophisticated and complicated and we’re now looking at questions like capacity. It is coming up more and more: did the person signing the BDBN have capacity?”

It’s understandable to question why disputes over mental capacity are becoming central in superannuation cases. While several factors may be contributing to this trend, Sladen Legal principal Phil Broderick views it as a natural step in the ongoing development of estate planning challenges.

“If you look at the history of death benefit-type challenges, they do follow a bit of a pattern. You had the earlier cases which were more about the control of the funds and then it evolved into BDBNtype challenges, and in more recent years you’ve had challenges on the basis of conflict. It seems like potentially capacity may be the next phase of where people are challenging these things,” Broderick notes.

“It could be argued every time there are these initial phases, practitioners might start to tighten things up a bit. So with those original trustee-type decisions, people started to nail down their trustee roles and after the BDBN cases, they started to get this area in order. It’s an interesting evolution and capacity could be next.”

A view shared between Broderick and DBA Lawyers special counsel Bryce Figot is that BDBNs simply haven’t been around long enough to face rigorous scrutiny over capacity issues in the courtroom.

“With wills, there’s a case from the 1800s, Banks v Goodfellow, and that’s sort of the seminal test which to this day is still referred to. People have been making wills and dying for centuries, but of course SMSFs and BDBNs are such new creations. We don’t have nearly as much jurisprudence on those things,” Figot says.

Some of the issues surrounding death benefit nominations and the capacity of members to make such directions came to the forefront earlier this year in a significant legal case, van Camp v Bellahealth Pty Ltd [2024] (the Nespolon case), heard by the New South Wales Supreme Court (see breakout box).

Timing is everything

The complexity deepens when we consider how the concept of capacity is interpreted by the courts. In the Nespolon case, one of the central arguments focused on issues of timing regarding the relevant person’s capacity and specifically how opioid medication may have affected decision-making abilities. The issue of when an individual is considered to be compos mentis is rarely simple.

“It’s possible to lose capacity and regain it. And people who enter comas lose capacity and they might exit the coma and regain capacity. There’s also more problematic instances, especially if people age. They might be lucid in the mornings but have questionable capacity in the evenings. Capacity is not necessarily a black-and-white switch,” Figot acknowledges.

Echoing this perspective, View Legal director Matthew Burgess shares an example from his own practice to illustrate the challenges of determining capacity, noting disputes can often arise long before they reach the courtroom.

“It’s such a nuanced area and generally it’s very, very subjective. By definition, the involved party is not unlikely to be self aware they’ve got a problem. It’s not like they’re in a coma and can’t speak. It’s so much more nuanced than that and it just makes it extraordinarily difficult,” Burgess reveals.

“In this situation, you’ve got an adult child who’s in their 50s, trying to negotiate with a parent who’s in their early 80s who still considers themselves completely in control of everything. And you sort of have to say, ‘well maybe now is the time for you to relinquish control of your SMSF’.”

Cases like the ones Burgess and Figot highlight are far from rare and such examples may be cited as evidence in heated disputes. This underscores the need for advisers to encourage early and thorough planning, especially when there are concerns about a potential decline in capacity.

“Capacity can vary hour by hour, it can vary day by day. I’ve had clients who come in one day, clearly understand what’s going on, but come in a week later and have no real idea. The timing around capacity is crucial because it’s not just about general capacity, but whether the person had the capacity at the specific point when they signed the document,” Hay-Bartlem explains.

“There are two times to test for capacity. One is when the client is telling you what they want and the second time is then when the documents are signed and you need to have capacity at both times.

“The Nespolon case is really interesting because he told his accountant and lawyer he wanted the binding death benefit nomination to go to his de facto a few days before it was actually signed and then he died later on the day it was signed. So we had a clear pattern of what he wanted over a couple of days and capacity reached those trigger points.”

Words from the wise

The question of whether an individual has the mental capacity to sign documents like a BDBN is expected to feature prominently in future disputes over superannuation death benefits, much like it has long been a focal point in will disputes.

However, as these cases increase, the nature of the disputes is also likely to change with the industry adapting to address the challenges faced by both members and advisers. As Broderick suggests, professionals in the field may begin refining their processes to improve the likelihood of securing a favourable outcome.

“What you’ll find practitioners have long done for wills, and no doubt do for BDBNs as well, is getting someone assessed for their medical capacity on the day they sign the documents. That’s what you often see in practices, getting a medical professional to assess them on that day and then sign the document on that day,” Broderick predicts.

As awareness of potential issues in this area grows, maintaining thorough records and a clear paper trail of evidence and discussions about an individual’s capacity will become increasingly crucial.

“The real concern is asking are we doing enough in the industry to be testing capacity with our clients. Most people in the SMSF industry have got the base-level ability to ask the right kinds of questions,” Hay-Bartlem recognises.

“What we need to do is make sure we’ve got evidence of what we’ve asked. If you have a discussion, but you can’t remember it because it’s five years later, and you’ve got no notes of what you talked about, that’s going to be the problem.

“There’s not always a really good chain of evidence about the discussions we’ve had and what evidence we’ve got of capacity. Whoever had the discussion needs to have good notes and we need to make sure we can understand them, read them, interpret them and they’ve covered off the sorts of questions we need to be able to prove the person had capacity.”

However, mental acuity issues must be considered within the sphere of wider estate planning issues, rather than in isolation.

“It’s very important to have an enduring power of attorney in place. If you don’t have an enduring power of attorney and you lose capacity, the fund is probably going to fail to be an SMSF within six months,” Figot says.

“Basically anyone in the SMSF could lose capacity, therefore, anyone in the fund should not just think about a binding death benefit nomination and the will, but also the enduring power of attorney.” Burgess agrees with Figot and suggests strategies to reduce the risk of disputes over capacity can be more broadly integrated into the overall estate planning process.

“Everyone understands they need an estate plan, but most people, even a lot of really good advisers, just assume that means getting a will done. That to us reinforces you’ve got to adopt a holistic approach,” he suggests.

“For example, what does the enduring power of attorney say? That might mean buying into this idea of a hygiene check every 12 months, which could well involve assessment of capacity and certainly could involve having documentation triggered, for example, by a medical assessment.”

The Nespolon case represents an early yet significant milestone in testing capacity issues linked to BDBNs, but it is unlikely to be the last. Capacity is set to remain one of the more challenging aspects of estate planning for SMSF trustees and we can expect it to play a central role in future disputes, potentially as a decisive factor.

How the courts handle this crucial issue going forward will be critical given the high stakes involved. Whether capacity becomes the Achilles heel of SMSF estate planning remains uncertain, but it is likely to be a key focus for the foreseeable future.

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Van Camp v Bellahealth Pty Ltd (2024) NSWSC 7

Dr Harry Nespolon, a prominent Sydney-based medical practitioner and president of the Royal Australian College of General Practitioners, passed away in 2020 following a nine-month battle with pancreatic cancer. On the day he died, he executed a BDBN, directing his superannuation benefits, held mainly in an SMSF of which he served as the sole director, be paid to his partner, Lindy van Camp, rather than his estate. The executors of his will contested the validity of the BDBN, arguing Nespolon lacked the mental capacity to make such a decision given the substantial doses of opioids administered to manage his severe pain.

In court, the judge meticulously assessed evidence regarding Nespolon’s mental state, including medical records, expert testimony and statements from those close to him. Despite acknowledging the gravity of his illness and the impact of his

medication, the judge determined Nespolon retained sufficient mental clarity to understand the BDBN’s implications. Notably it was considered he had a long history of independently managing his financial and legal affairs and had sought legal counsel shortly before executing the BDBN, demonstrating a clear grasp of its purpose and effect.

The executors further claimed van Camp had unduly influenced Nespolon, potentially exploiting his weakened state. However, the court found no credible evidence to support these allegations. Instead, it was highlighted Nespolon took proactive steps, directly contacting his legal adviser without any apparent involvement from van Camp, reinforcing the notion of his independent decision-making.

Ultimately, the judge upheld the validity of the BDBN, ruling it reflected Nespolon’s true intentions and was free of coercion or undue influence. The decision required the executors to pay the superannuation benefits directly to van Camp in accordance with the deceased person’s wishes and reinforcing his strategic estate planning aimed at providing tax-effective benefits to his dependants.

The case may set a precedent that is likely to be referenced in future cases involving similar disputes.

“There had been nothing which told us definitively what the test for capacity for a BDBN is. The case was particularly important because there’s always been a question about whether a BDBN is a testamentary document like a will, meaning the same capacity test would apply,” Cooper Grace Ward partner Scott Hay-Bartlem explains.

“The cases are now saying a BDBN is not a testamentary document. The Nespolon case does go through the test for capacity regarding this type of arrangement.

“The court took quite a sensible approach, which is it’s the ability to understand the effect and the nature of the particular document you are signing. In that particular case, capacity is very situational and very circumstance dependent.”