What can you do that will make sure your super death benefits are paid correctly, that’s easy to put in place, and difficult for aggrieved surviving relatives to challenge?
You might think the best and simplest approach is to complete a Binding Death Benefit Nomination (or BDBN).
Unfortunately, the super laws are never straightforward and within some superannuation legal circles, there’s an expectation that BDBNs can be successfully challenged. In fact, some argue that gaping holes exist in death benefit nominations and the trust deed provisions that allow binding death benefit nominations to operate.
Despite these gaps, you can improve the certainty around how your super will be distributed after death, but it takes some care and attention to detail.
As a starting point, it’s important to identify where possible weaknesses in your BDBN might exist so these can be addressed.
Two types of BDBNs
Within self-managed super funds there are potentially two different types of BDBNs: one expires after three years; the other can potentially last until it’s rescinded by the super fund member (these are often called non-lapsing BDBNs).
Three-year BDBNs
In 2008, the Australian Tax Office (ATO) issued an SMSF Determination that said the three-year BDBNs weren’t available to SMSFs. These three- year BDBNs are a bit like a will in that they have to be witnessed by two adults who won’t financially benefit from the binding nomination.
The following year in a Queensland Supreme Court case it was determined that the three-year BDBN were available to SMSFs because of the wording of the fund’s trust deed and, in particular, its catch-all clause.
The typical purpose of these catch-all clauses is to allow a trustee to do anything permitted or required by the super and tax laws.
Subsequent to this court decision, some lawyers said that three-year BDBNs can be used in an SMSF while others take a different view and say they are unavailable to DIY super unless the trust deed of the SMSF specifically allows them.
Non-lapsing BDBNs
In relation to non-lapsing BDBNs, some lawyers will recommend that a super fund’s trust deed include express provision for the nomination to become invalid upon the occurrence of certain events after the BDBN is executed such as marriage, divorce and a nominated beneficiary pre-deceasing the member.
It’s possible to draft or amend an SMSF trust deed so that a BDBN could provide for future contingencies, just as many people do with their will.
In some cases, it might be necessary to specifically detail who is to receive a death benefit in a trust deed. These are sometimes referred to as ’embedded BDBNs’ because the beneficiary is specifically mentioned in the fund’s governing rules.
If you want your death benefit paid to your legal personal representative (LPR), then it shouldn’t be paid until the LPR has been formally appointed by the Court (either via the granting of probate or the issuance of letters of administration).
One area of super fund death benefits that is often overlooked is the area of ‘notional estates’. If a BDBN pays a benefit directly to a member’s dependants, then the super assets don’t form part of the deceased’s estate. In all States and Territories other than NSW, a family provision claim can’t be made against such super death benefits.
The family provisions laws operating in NSW potentially open up a challenge to a BDBN and are meant to be applied across all States and Territories, however the other jurisdictions don’t appear keen to enact them.
This is very confusing for everyone involved in SMSFs. The original purpose of BDBNs was to make them as easy to use as possible – like cheap will kits that can be bought from a local newsagent or over the internet. The problems with cheap will kits are well-known so I suppose we shouldn’t be surprised that BDBNs have many similar limitations.
BDBNs need to be prepared with a great deal of care and it might be prudent to seek legal advice before actually executing one.
Two very important topics we haven’t addressed here include what happens with trusteeship upon a member’s death, the appointment of a replacement trustee and who can satisfy the definition of dependant. I’ll address these issues in future columns.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: What comes after Greece? [1]
- Lance Lai: Chart of the week: Spark Infrastructure [2]
- Paul Rickard: Our high-income portfolio – the second review [3]
- Rudi-Filapek Vandyck: The broker wrap: three stock buys and three sells [4]