Mr Townsend used the example of Fred and Wilma Flintstone who wanted to leave their SMSF death benefit to their friends’ son, Bam Bam, who had intellectual difficulties but did not qualify for NDIS support.

“The SIS Act lists three main categories of persons who may be classified as dependants of a deceased member,” Mr Townsend said.

“These are the deceased’s spouse, their child and any person with whom the deceased shared an interdependency relationship. Section 10A defines an interdependency relationship as valid if they share a close personal relationship, they live together, and one or each of them provides financial support to the other, and one or each of them provides the other with domestic or personal care.”

Since Bam Bam would not qualify as a dependant under this definition, Fred and Wilma decide to pay their benefit to their estate and nominate Bam Bam as a beneficiary; however, as they still have money owing on their mortgage, it is possible that if something were to happen to both of them, their bank could claim the benefit to pay the rest of the loan.

Mr Townsend suggested directing the couple’s life insurance policy rather than their death benefit to be paid to Bam Bam after their death, as depending on the conditions of the mortgage, it is more likely this amount cannot be taken as part of the debt.

“The policy would be paid to the superannuation fund, the trustee of which would pay it to the estate, the executor of which would then be free to pay it to the beneficiary without any interference,” he said.

“It would be advisable to place this money into some sort of protective structure like a testamentary discretionary trust.”