SMSF Technical Education & Strategies

 

BDBNs v Auto-reversionary Pensions

by Bryce Figot

DBA Lawyers.

There has been recent debate in SMSF circles regarding BDBNs and auto-reversionary pensions. This debate arises in the following situation.

A BDBN may prescribe that a member’s benefits are to be paid to their legal personal representative (estate). Conversely, that member may also be receiving an auto-reversionary pension which specifies that the benefits should continue to be paid as a pension on the member’s death to their spouse.

Upon the member’s death, should the member’s estate or spouse receive the benefit?

 

Does the BDBN trump the auto-reversionary pension (or vice versa)?

 

Definitions

BDBN

A BDBN is a binding nomination that allows an SMSF member to direct the trustee to whom to pay their death benefit.
Because a BDBN is binding, the trustee must follow the member’s instructions set out in the BDBN.

 

A properly drafted SMSF trust deed will allow for a BDBN to be executed by a member, which will bind the trustee upon the death of the member.

Auto-reversionary pension

An auto-reversionary pension refers to a pension that was set up with a specific provision. That provision stipulates that upon the death of the pensioner, the pension continues to be paid (ie ‘reverts’) to another person, who is typically a spouse.

 

 

Fettering trustees’ discretion

Legal view

Generally, a trustee’s discretion cannot be fettered (or restricted). That is, the trustee must exercise their discretionary powers and cannot restrain the powers they can exercise.

However, general law rules can be excluded by express provision in an SMSF’s trust deed. Therefore, potentially both BDBNs and auto-reversionary pensions are possible subject to the SMSF’s trust deed.

 

Application of the law

Many modern SMSF deeds will have the following provisions:

 a provision allowing a trustee’s discretion to be fettered by a BDBN; and
 a provision stipulating that although a member may request a pension, it is the trustee who resolves in its discretion to commence the pension and decide the terms.

Deeds typically oust the prohibition on fettering in respect of BDBNs. However, they fail to oust the prohibition in respect of auto-reversionary pensions. A validly executed BDBN however is typically far more likely to actually bind the trustee.

Accordingly, the BDBN would typically win in the event of conflict (subject to the fund’s specific governing rules of course).
Specifically for example, a BDBN will prevail under a DBA Lawyers’ SMSF deed.

 

 

Practical application

The members can avoid uncertainty by ensuring that their BDBN and their pension documentation are worded consistently.
It is good practice for advisers to periodically double check that the two do ‘speak with each other’ and take corrective action if they don’t. Particularly, where an adviser is instructed to update a particular document (eg, BDBN or pension), this should be viewed as an opportunity to ensure that the two are consistent with each other and the deed.

 

Bryce Figot is a Senior Associate at leading SMSF law firm DBA Lawyers (www.dbalawyers.com.au). Bryce can be contacted respectively at bfigot@dbalawyers.com.au. This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.

Note: DBA Lawyers hold quarterly SMSF seminars at venues all around Australia. For more details or to register, visit www.dbanetwork.com.au or call Marie on 03 9092 9400.

 

This article contains general information only and is no substitute for expert advice. Further, Bryce Figot & DBA Lawyers is not licensed under the Corporations Act 2001 (Cth) to give financial product advice. We therefore disclaim all liability howsoever arising from reliance onany information herein unless you are a client of DBA that has specifically requested our advice.