Son loses mother’s super to stepfather despite court challenge

A court ruling shows why trusting your partner’s will to protect your children’s inheritance could be a costly mistake.

A Federal Court ruling has shed light on superannuation death benefits. Picture: iStock

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A recent Federal Court case brings to light the issue of what happens to our super after we die.

Michael Steele, son of deceased industry super fund member Jennifer Cole, failed in his bid to overturn the decision of Hostplus to pay his stepfather his mother’s super fund balance.

Steele challenged the decision with the Australian Financial Complaints Authority, which ruled in favour of the stepfather, Stephen Cole, noting the decision from the fund Hostplus was “fair and reasonable”. Steele then took the case to the Federal Court, which also ruled against him.

When it comes to superannuation death benefits, there are two types of nominations that can be made – a “binding” death benefit nomination and a “non-binding” death benefit nomination. The stronger of the two, a binding death benefit nomination, directs the super fund to pay that person you nominate as long as they fall into the category of what is known as a “dependant”.

Dependants are defined as a spouse, a de facto spouse, a child of any age and someone in an interdependency relationship (close personal relationship, living together, provides financial support, domestic support and personal care).

Of note, the legislation does not explicitly mention financial dependants as an eligible category to be nominated under a binding death benefit nomination.

But according to AFCA, although financial dependency is not mentioned in the definition of “dependant” in the Superannuation Industry (Supervision) Act, known as SIS, that definition is an inclusive one.

“It is well established that a person who was financially dependent on a member (whether wholly or partly) when the member died is their dependant,” AFCA notes.

In his Federal Court challenge, Steele asserted that the decision of Hostplus to pay the stepfather rather than him went against the rules relating to dependants.

“Obviously as biological children of the member, we each reasonably expected to inherit at least a portion of our mother’s assets when she eventually passed,” he said. “AFCA failed to consider the weight of that reasonable expectation as a genuine form of expected continuing financial support from the member.”

The Federal Court upheld AFCA’s decision. Picture: Christian Gilles/NewsWire

In its decision, which was affirmed by the Federal Court, AFCA noted several reasons for denying Steele his mother’s superannuation benefit after her death.

AFCA found that neither Steele nor his sister were financially dependent on their mother at the date of her death, nor did her death cause them financial hardship. Also, AFCA was satisfied that the Hostplus decision was consistent with the wishes of their mother. The spouse, Stephen Cole, was the sole beneficiary of Jennifer Cole’s will made on May 10, 2005, and on May 31, 2005, Jennifer Cole also telephoned Hostplus and nominated Stephen Cole as her preferred beneficiary.

Although not a “binding” nomination and even though Jennifer Cole died many years later, in 2021, Hostplus considered the 2005 phone-based nomination and her consistent wish for her assets to pass to Stephen Cole as part of their decision to pay Cole and not Steele.

Why this case is a lesson for the rest of us

Steele contests that his mother and Stephen Cole had entered into reciprocal wills, leaving their assets to each other. However, Cole is claimed to have quickly changed his will after the death of Jennifer Cole in favour of his own biological children.

Steele said in his Federal Court submission: “AFCA would have the resources to investigate recently changed wills yet slanted the scales of fairness 100 per cent and 45 degrees into the spouse and his children’s favour anyway, and that act is incredibly unfair, cruel and provocative.”

Unfortunately for Steele, there is a risk that if you leave your assets in a mirrored will with your spouse or de facto, there is no guarantee that this person will not change their will after your death, potentially depriving people that you want to inherit your assets.

Instead of assets being split between, say, four children from separate marriages equally, if you die first, the surviving spouse is well within their rights to alter their will and cut out your children in preference of their own biological children.

Fair? Probably not. Legal? 100 per cent.

As such, best practice is to leave your assets in your own will rather than rely on someone else’s will to do this. Alternatively, seek specialist estate planning advice and consider the use of more advanced mechanisms such as life interests and testamentary trust structures.

Another lesson here is that there is no guarantee that you will automatically receive your parents’ superannuation account balance after they die. If your parents wish for their superannuation accounts to go to you as their children, best practice is to put in place a binding death benefit nomination so that the super fund has clear instruction and no discretion on how the funds are to be paid out.

The case of Jennifer Cole’s assets serves as a warning that without a valid and up-to-date binding death benefit nomination in place, superannuation death benefits can be contested by parties who feel aggrieved that they missed out. This can lead to long, costly and emotionally draining legal battles between the people that you left behind, as witnessed in this particular situation.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au