When superannuation wishes are not enough: AFCA, trustee discretion and death benefit nominations

Superannuation death benefits are often among the most valuable assets left behind when a person dies. Yet, they do not automatically pass under the member’s will and, in the absence of a valid binding nomination, their distribution depends on the exercise of trustee discretion.

This article considers whether that discretion, and AFCA’s review of it, gives proper weight to the deceased member’s expressed wishes, particularly where those wishes are recorded in a non-binding nomination.

A member’s interest in a superannuation fund is not usually an asset that can be demanded at will. It is a contingent interest, payable only when a condition of release is satisfied, such as retirement, reaching age 65, or death. On death, the member’s accumulated account balance and, often, any life insurance held through the fund are paid as a superannuation death benefit.

A member can control the distribution of a death benefit by making a valid binding nomination. In practice, however, many members either make no nomination or make only a non-binding nomination. In those cases, the trustee must identify the eligible recipients and then decide how the benefit should be distributed.

The legislation determines who may receive a death benefit. The trust deed then commonly gives the trustee a broad discretion to choose between eligible recipients. That distinction between eligibility and discretion is central to understanding death benefit disputes.

Non-binding nominations sit within that discretionary framework. They do not compel the trustee to pay the benefit as nominated, but they are evidence of the member’s wishes. They should ordinarily be treated as relevant considerations when the trustee decides what outcome is fair, reasonable, and consistent with the governing rules of the fund.

However, many trustee and AFCA death benefit decisions appear to favour financial dependants, even where the deceased made a non-binding nomination in favour of others.

The legal framework that governs the distribution of death benefits

The distribution of death benefits is regulated by legislation, regulations, the terms of the superannuation trust deed, court decisions and AFCA’s operating framework. The legal framework performs two distinct functions: first, it identifies who is eligible to receive a death benefit; secondly, where more than one eligible recipient exists, it permits a trustee to decide how the benefit should be distributed.

The hierarchy of beneficiary priority

The legislation creates a hierarchy of beneficiary types. The hierarchy involves the key categories ‘dependant’ and ‘legal personal representative’. If anyone fitting these categories can reasonably be found, then no death benefits can be paid to anyone else.

The definition of ‘dependant’ includes a spouse and any child. ‘Spouse’ includes a same-sex spouse, whether married or de facto. ‘Child’ includes an adopted child, an ex-nuptial child, a stepchild and any child of the deceased’s spouse, including any stepchild of the deceased’s spouse.

The definition of ‘dependant’ also includes financial dependants who are neither children nor spouses. The case law is not settled on whether ‘dependant’ extends to emotional dependence. ‘Legal personal representative’ (‘LPR’) means the executor of the will or administrator of the deceased’s estate.

Superannuation fund members can create a binding nomination that, if valid, removes any discretion from the trustee. Only dependants and LPRs can be validly nominated, and some formalities must be followed. The binding nomination lapses after three years. However, many trust deeds provide a second pathway for ‘non-lapsing’ binding nominations, which are permitted provided the trustee consents to the nomination. 

The effect of the hierarchy on the trustee is to define the scope of the superannuation trustee’s discretion. Thus, the first questions a trustee must decide are:

1. who, if anyone, is a dependant or LPR? and,
2. is there a valid binding nomination?

These questions can be difficult to answer due to complex and uncertain factual evidence. For example, whether a person is a de facto spouse is not always obvious.

In summary, the hierarchy of priority is:

1. dependants and LPRs nominated in a valid binding nomination;
2. dependants and LPRs not so nominated; and
3. others,

If a person from a higher-priority group can be found, no person in a lower-priority group will receive any part of the benefit.

The trustee’s discretion

The trustee has the discretion to decide how a death benefit should be distributed among eligible beneficiaries of the same priority.

Generally, a deed will give the trustee two distinct discretions. First, where there is no valid binding nomination, the trustee may choose between dependants and the LPR. Secondly, where there are no dependants and no LPR, the trustee may choose between other recipients permitted by the relevant law.

The deed generally will provide little guidance about how the discretion is to be exercised. The legislation identifies the eligible recipient classes, but no further guidance. That leaves the trustee to consider the circumstances of the particular case, including dependency, relationship, need, the terms of the trust deed and the deceased member’s expressed wishes, when exercising their discretion.

AFCA’s complaint framework

AFCA’s role is not simply to decide whether it would have made the same decision as the trustee. Its jurisdiction is to decide whether the trustee’s decision was ‘fair and reasonable in all the circumstances’.

If AFCA is satisfied that the trustee’s decision was unfair or unreasonable, it may set the decision aside and substitute its own decision. Death benefit complaints commonly involve several potentially interested parties, because the trustee must notify people who may have an interest in the benefit and allow them to participate.

Complaints to AFCA must be lodged within 28 days of the trustee’s decision. The short timeframe means disappointed potential beneficiaries must act quickly if they wish to challenge a death benefit determination.