This article considers some of the current issues associated with structuring non-commutable pensions
that are automatically reversionary to the member’s spouse on the member’s death.
Case study
Eric and his wife Jaye are considering their superannuation and estate planning matters. Eric has queried whether his superannuation interests in the Wonderfalls Fund can be paid to Jaye, should he predecease her, as a non-commutable pension, while the balance is paid to his two children from a previous relationship.
Option A: Mutual wills agreement
Under this option, on Jaye’s death, the balance of her superannuation death benefits, including the non-commutable pension, are paid to her LPR, being the executor of her will, pursuant to a valid and effective BDBN.
Jaye’s superannuation death benefits are then distributed in accordance with a special provision in her will requiring that her superannuation death benefits are paid directly to Eric’s children, or to a testamentary trust for the benefit of Eric’s children. A key benefit of a testamentary trust is the added asset protection aspects of the arrangement. It also allows income splitting at adult tax rates for children.
Eric and Jaye may wish to try to ‘lock in’ this strategy by executing a mutual wills agreement that provides that under Jaye’s will, the balance of the non-commutable pension will be paid to a testamentary trust established under her will for the benefit of Eric’s children. However, if after Eric’s death, Jaye elects to vary her will, any recourse is limited to instituting legal proceedings, which are likely to be costly and time-consuming. There are also no guarantees that such an action would be successful.
Further, any amount paid to Jaye’s estate is at risk of a testator family maintenance claim, including her superannuation death benefits. Where it is likely that such a claim may be made, it is generally not advisable to direct superannuation benefits to be paid to the estate, to avoid increasing the amount
potentially available to claimants.
Option B: Dual-fund structure
An alternative option is for Eric to establish another superannuation fund. The existing fund can be used to pay a non-commutable pension to Jaye on Eric’s death, while the new fund can be used to pay a benefit to his children directly or via Eric’s LPR. BDBNs should be made in respect of each fund. Further, each fund should have a separate corporate trustee and the necessary steps should be implemented to ensure the control of each fund passes to the right beneficiary (such as appointing successor directors in respect of each corporate trustee). Eric’s will should also address the transfer of
the shares in the corporate trustee.
A key benefit of this strategy is the certainty that Eric’s children and Jaye will each receive a proportion of Eric’s superannuation death benefits. It is crucial, however, to ensure that the balance of the non-commutable pension is sufficient to support Jaye (actuarial assistance may therefore be required).
Ideally, the terms of the pension should be drafted with sufficient withdrawal restrictions to ensure that the pension amount permitted to be drawn down each year is limited to an amount required by Jaye to maintain her standard of living and exhaust the pension amount during her lifetime, but not dissipate
the pension unnecessarily (subject to paying the statutory minimum each year).
On Jaye’s death, the balance of the noncommutable pension will form part of her member benefits in the fund and will be dealt with as follows:
- where Jaye has made a valid and effective BDBN, her superannuation death benefits will be paid to one or more of her superannuation dependants, or her LPR (being the executor of her estate) in accordance with the terms of the BDBN; or
- if Jaye has not made a BDBN, her superannuation death benefits will be paid to one or more of her superannuation dependants, or her LPR, at the trustee’s discretion.
Thus, unless Jaye directs the trustee to pay her superannuation death benefits to her LPR and has provided for this amount to be paid to Eric’s children under her will, they will not be entitled to receive the balance of the superannuation death benefits.
When utilising this strategy, it is important to consider succession of the control of each fund, either if Eric dies or if he loses capacity. While Jaye would ideally take control of Fund A and Eric’s children would take control of Fund B on Eric’s death, if Eric loses capacity it would be preferable to grant an enduring power of attorney to a trusted independent third party and have that third party control
each fund. Alternatively, granting a joint enduring power of attorney to Jaye and Eric’s children may be an option, but could give rise to complications and disputes.
Option C: Other alternatives
The options set out above are not exhaustive. There are numerous other strategies that can be used to effectively achieve the desired outcome, subject to tax and other considerations. We recommend obtaining legal advice before implementing arrangements of this type.
Conclusion
As can be seen from the considerations set out above, paying a non-commutable pension requires a number of issues and challenges to be worked through to successfully structure and implement this strategy. In particular, the control of the fund on death or loss of capacity is a fundamental matter that must be addressed with any succession planning structure that is adopted.Thus, unless Jaye directs the trustee to pay her superannuation death benefits to her LPR and has provided for this amount to be
paid to Eric’s children under her will, they will not be entitled to receive the balance of the superannuation death benefits.
When utilising this strategy, it is important to consider succession of the control of each fund, either if Eric dies or if he loses capacity. While Jaye would ideally take control of Fund A and Eric’s children would take control of Fund B on Eric’s death, if Eric loses capacity it would be preferable to grant an enduring power of attorney to a trusted independent third party and have that third party control
each fund. Alternatively, granting a joint enduring power of attorney to Jaye and Eric’s children may be an option, but could give rise to complications and disputes.
Option C: Other alternatives
The options set out above are not exhaustive. There are numerous other strategies that can be used to effectively achieve the desired outcome, subject to tax and other considerations. We recommend obtaining legal advice before implementing arrangements of this type.
Conclusion
As can be seen from the considerations set out above, paying a non-commutable pension requires a number of issues and challenges to be worked through to successfully structure and implement this strategy. In particular, the control of the fund on death or loss of capacity is a fundamental matter that must be addressed with any succession planning structure that is adopted.
