SMSF Technical Education & Strategies

 

SMSF Binding Death Benefit Nominations

by Denis Barlin
Director
SBN LAWYERS
22 March 2010

This article explains:

• - what a binding death benefit nomination is;

• - the effect of a binding death benefit nomination; and

- how binding death benefit nominations are made.

 

How is superannuation dealt with after death?

Payment made from superannuation funds after death are called “death benefits”.  The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the fund and not (as most people think) in accordance with the terms of the deceased’s will ( McFadden v Public Trustee for Victoria [1981] 1 NSWLR 15 at 22). That is, superannuation benefits are dealt with outside of the terms of a person’s will.  The payment of death benefits from a superannuation fund is therefore ultimately a matter for the discretion of the trustee of the fund, unless the legislation or the governing rules of the fund provide otherwise.

Can a member influence the decision?

A member can direct how their superannuation death benefits are to be paid after their death.  This direction is called a “binding death benefit nomination”. 

A binding death benefit nomination is a written direction the trustee that directs the trustee to pay the member’s superannuation benefits to certain dependents and/or the legal personal representative in the proportions set out therein in the event of the member’s death.  If the superannuation fund is not a self managed superannuation fund a binding death benefit nomination remains valid for 3 years from the date of signing;  however for self managed superannuation funds the nomination is valid until it is altered or revoked.

If the binding death benefit nomination is valid and in effect at the date of the member’s death, the trustee must pay the superannuation monies to the beneficiaries nominated in the proportions set out in the nomination.

Who can benefit?

Whether the member’s death benefits are paid pursuant to a binding death benefit nomination or by way of the trustee exercising its discretion, there are a limited class of persons to whom the benefits can be paid (i.e. ‘dependents’) (Section 55A of the Superannuation Industry (Supervision) Act 1993 (Cth) and regulation 6.22 of the Superannuation Industry (Supervision) Regulations 1994 (Cth).  As a result, whenever making a binding death benefit nomination, a member should limit the persons nominated to the class of persons who can actually benefit.  Subject to limited exceptions the member’s death benefits must be cashed in favour of a member’s legal personal representative and/or one or more of the member’s dependents.

“Dependents” include:

- a member’s spouse;

 

- a child of the member or the member’s spouse (including an adopted child, foster child, ward or child within the meaning of family law legislation);

 

- any person who was in an interdependency relationship with the member at the date of death and any other person (irrespective of age) who in the trustee’s opinion is or were in any way financially dependent on the member at the date of death.

A member’s “spouse” includes

- a person with whom they are legally married;

 

- a person (whether of the same or of a different sex) with whom they are in a relationship that is registered under an Australian State or Territory law; and

 

- a person (whether of the same or of a different sex) with whom they are not legally married but who lives with the member on a genuine domestic basis as a couple.

 

A member’s “legal personal representative” is their executor or administrator of their estate.  If a member nominates their legal personal representative in a binding death benefits nomination the benefits will form part of the member’s estate and will be distributed in accordance with their will, if the member has one, or in accordance with the laws of intestacy.

There is no limit to the number of dependents that may be nominated.  The only restriction is that the various percentages applied to each dependent and, if nominated, the legal personal representative should add up to 100%. The most appropriate dependents to nominate will depend on the personal circumstances of the particular member.  The taxation implications of the various dependents will be a relevant consideration in making this decision. 

How do you make a valid binding death benefit nomination?

If the relevant fund is a self managed superannuation fund there are no restrictions (other than the class of persons who can be nominated) in the form that the binding death benefit nomination can take (Self Managed Superannuation Fund Determination 2008/3).  Provided the document is sufficiently clear it will bind the trustee. 

If the relevant fund is not a self managed superannuation fund, the legislation is quite specific on the requirements for a binding death benefit nomination to be legally effective:

 

- the beneficiaries must be a dependent or the legal personal representative;

- the proportions for payment must be certain.  100% of the member’s benefit must be allocated – the entire nomination will be invalid if the allocation does not equally exactly 100%;

- nominations must be in writing, be signed and dated by the member in the presence of two witnesses who are at least 18 and are not beneficiaries.  The nomination must contain a declaration signed and dated by the witnesses stating that the member signed the nomination in their presence.

 

As stated above, a binding death benefit nomination will remain in effect for 3 years, however for SMSFs the ATO has stated that this provision does not apply, and in conjunction with an appropriately worded trust deed, a BDBN can last indefinitely. Note that there is a little bit of conjecture arond this, so a membermay prefer to continue to bind the trustee in accordance with a binding death benefit nomination by confirming it before the ususal 3 yr period is up.  It can be confirmed by written notice to the trustee that has been signed and dated by the member before the nomination expires.

Can a binding death benefit nomination be amended?

A member can amount their binding death benefit nomination at any time by completing a new binding death benefit nomination expressing the new intention of the member.  A member can also revoke a binding death benefit nomination at any time by giving written notice, signed and dated by the member in the presence of 2 witnesses who are at least 18, to the trustee.

What happens without a binding death benefit nomination?

If there is no binding death benefit nomination in place when a member dies, there are 2 options:

 

• No nomination – if no nomination is made the trustee of the superannuation fund is bound to deal with the deceased member’s benefits in the best interests of the member.  That is, the trustee will typically make enquire about the deceased member’s family situation, inter-dependants, the provisions in the will, etc before making a decision.

•  

• Non-binding nomination – a non-binding nomination will provide guidance, but not direction, to the trustee.

Binding death benefit nominations are particularly important where self managed superannuation funds are involved.  There have been cases (for instance, Katz v Grossman [2005] NSWSC 934) where family disputes have arisen because of the absence of a binding death benefit nomination. 

A deceased member, who has directed how their property is to pass under their will and has assumed the superannuation will follow in the same way, has not made a binding death benefit and a person (maybe a partner from a second marriage or one out of a number of children) must decide how the money is paid because they are the remaining trustee. 

That person’s decision is all too frequently disputed by other dependents or relatives of the deceased, leading to expensive proceedings to resolve the issues.  To avoid these sorts of costs and heartaches a valid binding death benefit nomination is desirable.