A common misconception held by many people is that superannuation is distributed according to the terms of their will. However, the payment of benefits from a SMSF upon the death of a member are made in accordance with the governing rules of the fund and not according to the terms of the member’s will. It is therefore vital that every member of a SMSF directs how benefits are paid.
Superannuation is increasingly a major asset for Australians. For retirees and those approaching retirement, superannuation is generally the largest or only asset after their main residence. For younger Australians, automatic group insurance cover in retail and industry superannuation funds means they they often have significant life insurance tied to their superannuation. Given its significance, it is vital that superannuation is properly dealt with as part of your estate planning strategy.
Options for SMSF Members
There are generally three options available for members of a SMSF in relation to their death benefits:
- To make “no nomination“;
- To make a “non-binding death benefit nomination“;
- To make a “binding death benefit nomination” (BDBN).
Non-Binding Death Benefit Nomination
A non-binding death benefit nomination notifies the trustee of the member’s preferred beneficiaries and the division of benefits but leaves the decision to the trustee (unless the governing rules of the fund provide otherwise).
SMSF members create a non-binding death nomination for a variety of reasons, including:
- they have not thought about the issue or sought advice; or
- they have not made their mind up about dividing their assets; or
- because they know that superannuation law requires the benefits to be directed to dependants or their legal personal representative; or
- because other SMSF members are family, they assume their benefits will end up with their family members; or
- leaving some discretion to the trustee allows for changes circumstances to be taken into account, such as tax implications and change in relationships or dependancies.
Binding Death Benefit Nomination
A binding death benefit nomination leaves no discretion to the trustee about how or to whom benefits are paid – the benefits must be paid out in accordance with the nomination. This can therefore be used to ensure no disputes arise between relatives.
Nominations must be valid
It is important to be aware that a nomination must also be “valid”.
The recent decision of Munro v Munro highlights the potential consequences of failing to make a valid nomination.
In short, the deceased’s accountants completed a document entitled “Binding Death Benefit Nomination” directing the trustees of the SMSF to pay the death benefit to the “Trustee of Deceased Estate”. The deceased signed the completed form. A dispute arose between the trustees of the SMSF and the deceased’s biological daughters from a previous marriage. The Supreme Court of Queensland considered that the nominated “Trustee of Deceased Estate” was not one of the class of persons which the deceased could direct his death benefits to because the SMSF trust deed only allowed payment of death benefits in favour of a dependant or a member’s legal personal representative. Therefore, the binding death benefit nomination was not valid.
The decision in Munro highlights how important it is for SMSF members to ensure that the requirements under their SMSF trust deed are satisfied because each SMSF trust deed is different and has different requirements – it is not a case of simply “filling in the form”.
If you would like to check whether your binding death benefit nonination is valid, or you would like to make a valid binding death benefit nomination as part of your estate planning, call us on 8523 8400 (Gawler) or 8211 6500 (Adelaide) to arrange an appointment for an initial no obligation consultation. Alternatively, send an email to firstname.lastname@example.org and we will contact you.