Have you made a binding death benefit nomination for your SMSF?
It is often wrongly assumed that a self-managed super fund (SMSF) member’s death benefits automatically form part of their estate. This is not the case. Without a binding death benefit nomination, the trustee of the member’s SMSF has the discretion to distribute superannuation death benefits to a range of beneficiaries specified in superannuation law (e.g. spouse, former spouse, children, step children etc). If there is no binding death benefit nomination and the trustee does not exercise their discretion, the superannuation benefits will pass in accordance with the rules of the fund.
The trustee’s discretion can only be overridden by the member if they make a binding death benefit nomination. If a member makes a binding death benefit nomination, the trustee must pay the superannuation death benefits to the person nominated by the member. The person nominated in the binding death benefit nomination must fall within the permitted range of beneficiaries outlined in superannuation law. Below, we have answered some common questions about binding death benefit nominations.
I already have a will. Isn’t that enough?
No. A binding death benefit nomination is different to the provisions in a will. Superannuation is a non-estate asset that does not automatically pass with the will of a member. There are a number of cases where potential beneficiaries have brought claims because the trustee did not distribute a superannuation death benefit in accordance with a will. Each time, the courts found that the trustee was acting within their discretion in the absence of a binding death benefit nomination.
What is the difference between a binding death benefit nomination and non-binding death benefit nomination?
In short, binding death benefit nominations override the trustee’s discretion, and non-binding death benefit nominations do not. A non-binding death benefit nomination is an indication to the trustee of the fund of who the member would prefer the death benefit is paid to. The trustee is still able to exercise their discretion when distributing the death benefit. Non-binding death benefit nominations allow the trustee to consider the factual circumstances at time of death, such as tax implications. While binding nominations provide certainty, non-binding nominations allow for flexibility.
When I die, will my executor or legal personal representative be the trustee of my SMSF?
Trusteeship does not automatically pass to your executor or legal personal representative. Review the provisions of your trust deed to ensure that it specifies that trusteeship will pass to your executor or legal personal representative on your death.
Does my binding death benefit nomination last until I die, or does it expire?
Under superannuation law, binding death benefits generally lapse after 3 years if they are not confirmed. However, the situation is different for SMSFs. Section 59(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) outlines a few exceptions to the rule that the governing rules of a superannuation entity must not permit a discretion under those rules that is exercisable by a person other than a trustee of the entity. The provision expressly states that it does not apply to SMSFs. Section 59(1A) outlines that binding death benefit nominations must be made in accordance with the regulations, which state that binding death benefits lapse after three years. Previously, there was some confusion as to whether the second provision was only an exception to section 59(1) or whether it applied to SMSFs.
In a 2008 ruling, the ATO stated that section 59(1A) does not apply to SMSFs. This means that SMSF members can make non-lapsing, indefinite binding death benefit nominations. Of course, the ability to make indefinite binding death benefit nominations is subject to the provisions of the SMSF trust deed.
How can I make a binding death benefit nomination?
Superannuation laws do not outline the process for making a binding death benefit nomination. This process must be outlined in the SMSF trust deed itself. For the binding death benefit to be effective, the process specified in the trust deed must be correctly followed. Complex issues can arise when a Reversionary Pension is in place with an inconsistent binding death benefit nomination. It is important that you seek expert legal advice to ensure that your binding death benefit nomination is validly made in accordance with the provisions of the trust deed.
Unsure about the terms of your SMSF trust deed? Want to ensure that your binding death benefit nomination is valid? Our expert commercial lawyers are experienced in complying with making binding death benefit nominations which comply with trust deeds and superannuation law. Please don’t hesitate to contact Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.