Australia’s most famous court battle over superannuation assets is today known as “Kats v Grossman”. Today it’s a classic text book example of the dangers of getting your estate planning wrong and the importance of seeking independent advice in this area. In this article we’ll take a fresh look at the case and offer several suggestions on avoiding getting into court over this type of issue.
Mr & Mrs Katz had been long term members of their superannuation fund and acted as individual trustees of their fund. In 1998 Mrs Katz died and her member balance of over $550,000 was paid out as a death benefit to her husband leaving Mr Katz as the sole member of the fund with a balance of over $1 million. Following the death of Mrs Katz, Mr Katz appointed his daughter, Linda, as an additional trustee of the fund to ensure the fund remained compliant and had two individual trustees.
Mr Katz then completed a non-binding death benefit nomination stating he wanted his death benefit to be paid equally between his daughter (Linda Grossman) and his son (Daniel Katz). Mr Katz died in 2003 but one month prior to his death, his daughter applied to become a member of the fund and used her position as trustee to accept herself as a member of the fund.
Following the death of Mr Katz, his daughter as surviving trustee appointed her husband as a trustee of the fund and subsequently paid the entire death benefit to the daughter, making no payment to the son. The son fought the decision in court on the basis that the appointment of his sister and her husband as trustees of the fund was invalid. He lost the case and received no benefit from the fund.
The facts of the story speak for themselves; clearly Linda has used her power as trustee to ignore a declaration by Mr Katz that his benefit should be divided equally between his daughter and son. The court’s decision has upheld her actions by confirming that Linda had not acted illegally in benefiting herself over her brother. Interestingly, at the end of the day there was no winner! The court agreed that all court costs should be paid by the super fund severely depleting the level of funds available to Linda.
This regrettable saga could have been avoided if Mr Katz had completed a binding death benefit nomination; this would have ensured the trustees had little choice but to honour the intent of Mr Katz. Unfortunately for aggrieved beneficiaries like Daniel Katz, SMSFs are not subject to the jurisdiction of the Australian Superannuation Complaints Tribunal as this avenue is only available to members of APRA-regulated super funds. This means the only avenue is to take your matter to the courts, which as shown in Katz v Grossman, can be an expensive outcome for all (expect the lawyers!).
Another option for Mr Katz would have been to use a corporate trustee which would have avoided the necessity to retain two individual trustees following the death of Mrs Katz. Under this option, Mr Katz could have continued to manage the super fund in the capacity as a sole director of the trustee company and hence avoid the requirement to appoint another trustee. On his death, Mr Katz’s executors would have stepped in and taken control of the fund.
Alternatively and also an extreme option, there may be situations where is may be advantageous to run two SMSFs. This will be more relevant in blended families where children are from different marriages. Under this scenario you maintain one SMSF for your current family and another SMSF for the children of a previous marriage. In the first SMSF you hold a binding death nomination to your current spouse and children. In the second SMSF you hold a binding nomination to your children from your previous marriage. In this case you obviously have two sets of administration and accounting fees, but this option clearly separates your capital into two segmented structures and will avoid having different families fighting over a single structure.
Mr & Mrs Katz had been long term members of their superannuation fund and acted as individual trustees of their fund. In 1998 Mrs Katz died and her member balance of over $550,000 was paid out as a death benefit to her husband leaving Mr Katz as the sole member of the fund with a balance of over $1 million. Following the death of Mrs Katz, Mr Katz appointed his daughter, Linda, as an additional trustee of the fund to ensure the fund remained compliant and had two individual trustees.
Mr Katz then completed a non-binding death benefit nomination stating he wanted his death benefit to be paid equally between his daughter (Linda Grossman) and his son (Daniel Katz). Mr Katz died in 2003 but one month prior to his death, his daughter applied to become a member of the fund and used her position as trustee to accept herself as a member of the fund.
Following the death of Mr Katz, his daughter as surviving trustee appointed her husband as a trustee of the fund and subsequently paid the entire death benefit to the daughter, making no payment to the son. The son fought the decision in court on the basis that the appointment of his sister and her husband as trustees of the fund was invalid. He lost the case and received no benefit from the fund.
The facts of the story speak for themselves; clearly Linda has used her power as trustee to ignore a declaration by Mr Katz that his benefit should be divided equally between his daughter and son. The court’s decision has upheld her actions by confirming that Linda had not acted illegally in benefiting herself over her brother. Interestingly, at the end of the day there was no winner! The court agreed that all court costs should be paid by the super fund severely depleting the level of funds available to Linda.
This regrettable saga could have been avoided if Mr Katz had completed a binding death benefit nomination; this would have ensured the trustees had little choice but to honour the intent of Mr Katz. Unfortunately for aggrieved beneficiaries like Daniel Katz, SMSFs are not subject to the jurisdiction of the Australian Superannuation Complaints Tribunal as this avenue is only available to members of APRA-regulated super funds. This means the only avenue is to take your matter to the courts, which as shown in Katz v Grossman, can be an expensive outcome for all (expect the lawyers!).
Another option for Mr Katz would have been to use a corporate trustee which would have avoided the necessity to retain two individual trustees following the death of Mrs Katz. Under this option, Mr Katz could have continued to manage the super fund in the capacity as a sole director of the trustee company and hence avoid the requirement to appoint another trustee. On his death, Mr Katz’s executors would have stepped in and taken control of the fund.
Alternatively and also an extreme option, there may be situations where is may be advantageous to run two SMSFs. This will be more relevant in blended families where children are from different marriages. Under this scenario you maintain one SMSF for your current family and another SMSF for the children of a previous marriage. In the first SMSF you hold a binding death nomination to your current spouse and children. In the second SMSF you hold a binding nomination to your children from your previous marriage. In this case you obviously have two sets of administration and accounting fees, but this option clearly separates your capital into two segmented structures and will avoid having different families fighting over a single structure.
Author:
Russell Lees
Russell Lees is a partner and senior adviser at Donnelly Wealth Management. To contact Russell, e-mail russell@donnellywealth.com
Russell Lees is a partner and senior adviser at Donnelly Wealth Management. To contact Russell, e-mail russell@donnellywealth.com
Source: Australian Superannuation
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