Of sound mind? Capacity in the context of Binding Death Benefit Nominations

Given the role a Binding Death Benefit Nomination (BDBN) plays in estate planning, an argument could be made that the capacity to make a BDBN should be the same as the capacity to make a Will. The Supreme Court of New South Wales considered this argument in the case of Van Camp v Bellahealth Pty Ltd [2024] NSWSC 7. The decision provides guidance about the level of understanding that a person making a BDBN should have about the effect the document will have on their broader estate plan.

The role of the BDBN in estate planning

BDBNs are written directions from members of a superannuation fund to the trustee setting out how they wish some or all of their superannuation benefit to be paid after their death. A nomination can be made in favour of the deceased’s dependants, such as a spouse, children or a person financially dependent on the member, or to the member’s estate, to be distributed in accordance with their Will. There are tax exemptions or concessions if the death benefit is paid to certain dependants.

The case

Dr Harry Nespolon and his de facto spouse, Lindy van Camp, had been in a relationship since 2014 and had two daughters together. They resided in a property owned solely by Dr Nespolon. Most of their assets were held in Dr Nespolon’s name.

Before his death, when discussing the terms of his Will with his solicitor, Dr Nespolon had expressed his concerns about Ms van Camp’s ability to handle money and that she would re-partner after his death. For this reason, they discussed leaving his estate to a trust for Ms van Camp’s benefit but controlled by a third party. At that time, despite the solicitor explaining that there would be no tax payable if his death benefit passed to Ms van Camp, Dr Nespolon said he instead wanted his death benefit to go to the estate to form part of the trust. A draft Will was sent to Dr Nespolon but not signed.

Equally, Ms van Camp had concerns about her ability to access funds for the benefit of the family after Dr Nespolon had died. Ms van Camp had raised these concerns with Dr Nespolon for a significant period before his death. Dr Nespolon’s view was that the income from various trusts would be sufficient for Ms van Camp, and took steps to appoint her to control some of those trusts.

A couple of months after these discussions, Dr Nespolon engaged a new financial adviser, who recommended he make a BDBN in favour of Ms van Camp, which would reduce the tax payable on his death.

On 15 July 2020, Dr Nespolon was admitted to hospital. He signed his Will on 23 July 2020. The following day, Ms van Camp visited him in hospital, and he telephoned his solicitor with instructions to urgently prepare a BDBN in her favour. The solicitor noted that he sounded ‘drugged up’.

Dr Nespolon signed the BDBN on 26 July 2020, the day of his death. Ms van Camp arranged the BDBN to be printed and taken to him. She did not take him the covering email, which contained advice from the solicitor regarding the content and effect of the BDBN.

Dr Nespolon’s doctor, who was witnessing the document, asked Dr Nespolon if he knew what he was signing. Dr Nespolon responded that it was related to his Will, and was to prevent Ms van Camp from being ‘taxed out of her brains’.

The arguments for setting the BDBN aside

The trustee of the superannuation fund formed a view that the BDBN was invalid, because:

• Dr Nespolon lacked capacity to make the BDBN when he signed it
• there was unconscionable conduct by Ms van Camp.

The trustee proposed to pay the death benefit to Dr Nespolon’s estate, which would result in the death benefit passing to the testamentary trust established by the Will.

The meaning of ‘capacity’ in the context of BDBNs

The Court referred to the following general principles:

1.         The standard of capacity required by law is specific to the transaction.

2.         The question is not whether the person actually understood the transaction, but whether they were capable of understanding the transaction had an appropriate explanation been given.

3.         The presumption of capacity meant that it was up to the party seeking to have the BDBN set aside to prove that Dr Nespolon lacked capacity to make the document.

The trustee argued that the BDBN was a complex document given the consequences for Dr Nespolon’s broader estate planning. It also argued, analogous to the factors for testamentary capacity, that Dr Nespolon needed to be capable of comprehending and weighing up the benefits of paying the death benefit to each possible dependant.

However, the Court rejected this argument on the basis that:

• capacity has to be assessed in light of the particular transaction
• a BDBN itself is not complicated, and the terms of Dr Nespolon’s BDBN were straightforward – he was directing the trustee to pay his death benefit to Ms van Camp
• Dr Nespolon was well educated in business and medicine, was a director of various companies and would be capable of understanding the terms and effect of the document if it was explained to him
• the medication Dr Nespolon was taking would have affected his cognitive function, but the degree of impairment was difficult to ascertain
• Dr Nespolon demonstrated an understanding of the purpose of the BDBN in his response to the doctor who asked if he knew what he was signing.

The Court’s findings on unconscionability

The Court applied the elements of unconscionable conduct:

• a relationship that places one party at a special disadvantage over the other
• knowledge of the special disadvantage by the stronger party
• an unconscientious exploitation by the stronger party of the weaker party’s disadvantage.

Ultimately, the Court held that Ms van Camp’s conduct could not constitute unconscionable conduct given the following circumstances:

1.         Ms van Camp had not been the source of Dr Nespolon’s belief that he should make a BDBN in her favour.

2.         Ms van Camp’s request for funds and concerns about expenses was a likely factor contributing to the Dr Nespolon’s decision to instruct the solicitor to prepare a BDBN in her favour.

3.         Given the urgency, emotions and the stress Ms van Camp would have been experiencing, her failure to print and take the solicitor’s covering email with advice about the effect of the BDBN to Dr Nespolon for him to review was probably unintentional and not dishonest.

4.         Ms van Camp would not have known or ought to have known of the existence and effect of any special disadvantage Dr Nespolon was under.

Conclusion

This case is interesting as it separates the making of a BDBN from the broader estate planning context, and reiterates the principle that capacity is to be assessed in relation to the particular document or transaction being entered into. In that sense, it reflects the reasoning in the Queensland decision of Lambourne v Marrable [2023] QSC 219 (which is currently under appeal).

It also serves as a reminder of the importance of clear documentation and of taking notes of discussions had with clients as a safeguard against disputes about the validity of estate planning documents.

For further information or assistance with your estate planning requirements, please speak with one of the key contacts listed.