Key points

• SMSF death benefits aren’t automatically part of a deceased estate.
• You can’t be sure that a completed Binding Death Benefit Nomination will always be followed and you have nothing to worry about.
• Even with the greatest planning in the world, a recalcitrant individual can make life hell for your survivors.

Upon the death of an SMSF member, there are three critical issues that have to be addressed: Who controls the fund?; what succession applies to the death benefit?; and what powers are available to work out how a death benefit can be paid?

Unfortunately there are also a number of big misunderstandings about super fund death benefits. If these were adequately addressed then disputes about fund death benefits could be lower and probably occur less frequently.

Here are the big issues that people may not be aware of:

1. SMSF death benefits aren’t automatically part of a deceased estate
2. You can’t be sure that a completed Binding Death Benefit Nomination (more on these in a moment) will always be followed and you have nothing to worry about
3. Even with the greatest planning in the world, a recalcitrant individual can make life hell for your survivors

All of these can be adequately dealt with in most cases with good careful planning.

That said, we have to accept that we can’t fully control events from the grave and sometimes despite our best efforts to do the right thing, our hard work can be destroyed by a difficult individual.

None of this removes or absolves our responsibility to try and ensure that our loved ones are financially protected if the worst happens to us.

So who gets a super fund death benefit?

Above, I made the comment that super is not automatically part of a deceased estate. This begs the question then: who gets the money?

There are two possibilities:

1. Dependants – includes the following – your spouse, your children or anyone with whom you’re in an interdependency relationship.
2. Your deceased estate

Who decides who receives the death benefit?

This will be the person (or people) who controls your fund after death.

For example, take the following situation – Jim and Mary are individual trustees of their SMSF. Jim has just died and his preference had always been that his death benefit would be paid to his deceased estate. Upon his death, this means Mary is the sole surviving trustee and member. A one-member fund with a single individual trustee doesn’t satisfy the structural definition of an SMSF. As the sole trustee is the same as the member, it also fails the normal definition of a trust. Fortunately, the law gives Mary six months to sort this problem out.

The super laws say that upon a member’s death, the person’s legal personal representative (that is, executor) can be appointed and act as trustee until a portion of the death benefit can be paid.

However, there is no compulsion to have this provision in a fund’s trust deed.

In our example, who is Jim’s executor? Technically, this person (or even more than one person) has no legal standing until they’re officially appointed by the relevant Supreme Court. Assuming Mary isn’t Jim’s executor, in my view, it would be unwise for Mary to agree to the appointment of Jim’s nominated executor, if that individual hasn’t been formally appointed by the Court.

If this requirement isn’t in your fund’s trust deed, then what does the trust deed say about appointing a replacement trustee? The Trustee Act, in your State or Territory, is also an important reference.

If your fund has a corporate trustee, then the five key documents on the appointment of any new directors are: the fund’s trust deed, the company’s constitution, the Corporations Act, the relevant super laws and your State/Territory Trustee Act.

Jim’s death benefit

As we noted above, Jim wants his death benefit paid to his deceased estate.

There are three potential options here, depending on what Jim did before he died.

1. Jim completed no death benefit nomination – in this case, it will be up to Mary, and potentially any newly appointed trustee, to decide how his benefit is paid. They could elect any or all of the above two choices – i.e., the dependants or estate. The trustees would decide the amount of money paid to each beneficiary.
2. Jim completed a non-binding nomination – this nomination isn’t binding on his surviving trustees; the trust deed will probably say that the nomination can be used to guide the trustees in their decision making but isn’t binding on them. Effectively this means the SMSF’s trustees need to make a decision about the payment of the death benefit as noted immediately above.
3. Jim completed a binding death benefit nomination – these are nominations that bind trustees by removing their ability to determine who will receive the death benefit. Initially, the first job of the trustees is to determine if this nomination is valid. That is, are these nominations allowed under the trust deed? Has it been completed correctly (including only nominating dependants or deceased estate) and given to the trustee in accordance with the provisions of that deed?

Let’s assume that Jim has completed a Binding Death Benefit Nomination that states that Jim wants the benefit to be paid to his estate.

If the nomination is valid, then it would have to be adhered to, however there have been Court cases involving surviving spouses, who have refused to pay money to children from prior relationships. The surviving trustees could run the risk of ignoring the binding nomination but would, at the same time, run the risk of a Court determining that they had breached their trustee duties.

Death benefit only paid once probate granted

The legal status of an executor is uncertain before a Court grants probate. Therefore it would be good practice not to pay a super fund death benefit to an estate until probate has been granted and the named executor, or someone else, has been officially appointed to wind up the deceased’s financial affairs and distribute the assets in accordance with the Will.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.