Planning your estate

SMSF technical expert and columnist for The Australian newspaper
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Estate planning involves the administration and management of a person’s property before or after death. It typically covers death as well as severe mental or physical disability and even bankruptcy. Superannuation, and self-managed super funds in particular, are handy estate planning vehicles.

How do death benefits work?

Many people misunderstand how death benefits are treated in superannuation. In an ideal world, the process of paying a death benefit from a super fund is done in the following order:

  1. The trustees examine their trust deed to see who is eligible to receive the death benefit.
  2. The trustees make sure their intended beneficiaries can receive a death benefit under the super laws.
  3. The trustees work through the tax aspects of a death benefit.

In reality, however, it is often a bit of a chicken and egg issue. In most cases you move between the trust deed, super laws and tax aspects until you end up with the best solution that satisfies all three aspects.

Who can receive super fund death benefits?

In broad terms, those who can receive super fund death benefits will be dependants of the deceased or the deceased member’s estate.

The trust deed

The trust deed is a super fund’s most important document. Also important are any associated governing rules. In most cases, the trust deed and governing rules are the one document and so for simplicity here we will refer to them collectively as a fund’s trust deed. You’re trust deed needs to clearly set out who will receive death benefits.

The trust deed should include provisions which:

  • Define a member’s dependants (read How to define beneficiaries);
  • Detail how those dependants can receive any death benefits;
  • Detail if and how a member can direct how their death benefit is paid; and
  • Specify whether or not a member can provide a death benefit nomination which the trustee must enact.

In most SMSF trust deeds, a dependant will be a member’s spouse, former spouse or children. Some older trust deeds will insist that any death benefits have to be paid as a lump sum, while more recent trust deeds will allow the payment of a pension.

Generally a super fund member will be allowed up to three different ways to influence how a trustee pays out their death benefit. These are:

  1. A non-binding direction;
  2. A binding nomination with an expiry term;
  3. A binding nomination without an expiry term.

The pitfalls of non-binding directions

A non-binding direction provides the surviving trustees with an indication of how a member might like a death benefit paid. In many situations this will be perfectly adequate but there are situations when the direction may be contested and deliver an unsatisfactory outcome.

For example, in a NSW Supreme Court case called Katz v Grossman that involved an SMSF and a non-binding death benefit direction, both parties agreed that the high cost of the action would come out of the potential death benefit.

Binding nomination with an expiry term

A binding nomination with an expiry term specifically provides that a super fund member can direct a trustee to pay a death benefit to nominated dependants or to the member’s estate. These nominations must be witnessed by two independent adults. These binding nominations are often referred to as ‘6.17A nominations’, which is the super law that sets out what these nominations must contain in order to be valid. The problem with these types of binding nominations is that the law is inconsistent and in some sections, contradictory.

You must specifically state in your trust deed if you want to include a binding nomination and the document that contains the nomination must be clearly titled ‘binding nomination’.

The document should generally only contain percentages and not dollar amounts. For example: “I want ‘z’ to receive 50% of my death benefit;” and probably can’t nominate a dollar amount or the type of benefit.

It is doubtful that these binding nominations can contain alternate or cascading nominations. An example of this is: “If ‘x’ predeceases me, then please pay my benefit to ‘z’.”

With these nominations, it is generally not possible to nominate that a person receives a specific asset.

Binding nominations without an expiry term

Binding nominations without an expiry term are specifically allowed in the laws for SMSFs. If an SMSF’s trust deed provides for it and the nomination is carefully drafted, then it is possible that the following features can be allowed:

  • Alternate or cascading nominations where the binding nomination must be properly drafted to ensure there is no ambiguity.
  • A percentage or dollar allocation to be paid to a nominee.
  • Specify how a death benefit is to be paid – a pension or lump sum – and the characteristics of the pension to be paid (for example, the level of income payments) can also be specified.

If a death benefit is to be paid from a specific superannuation interest. In the case of SMSFs this will mean either from a member’s accumulation interest or one or more pension interests.

These nominations could also specify that a death benefit be paid from a specific asset of the fund. This type of clause can only be used where a super fund specifically defines assets as being held for a particular member.

Depending on how such nominations are implemented in the trust deed, it may be important to use the words “binding nomination” as the title of the document.

Can a will be a binding nomination?

This is a very complex legal issue and will depend on the wording of the will and the requirements in the trust deed for the drafting and acceptance of a binding nomination.

Discrepancy between the trust deed and the super laws

When there is a discrepancy between the trust deed and the super laws, it is the trust deed which generally takes precedence.

Most SMSFs contain general compliance and catch-all clauses. The older the trust deed the greater the likelihood that reliance will be placed upon these clauses. Depending upon the wording of a super fund’s general compliance clause or catch-all clause, specific super law provisions may be included into a super fund’s trust deed.

Other issues about binding death benefit nominations 

There are a range of issues about BDBNs which need to be considered:

  • What happens when a nominee dies before the SMSF member? In these situations, the nomination has no effect and the surviving trustees determine how a death benefit is paid. There is no per stirpes rule in the law of trusts (that is, when the benefit is passed on to the nominee’s next surviving generation) which means that children of the deceased nominated person will not automatically receive a benefit.
  • The trust deed needs to clarify whether a former spouse can be nominated as a beneficiary. It needs to state what type of spouse can be nominated, and if a binding nomination will automatically cease if it relates to a former spouse.
  • When using relational terms, make sure the term refers to the intended person. For example, the person represented by the word “spouse” will change if you remarry.
  • Does the trust deed allow a binding nomination to be completed by delegation, for example by an Enduring Power of Attorney? Generally an attorney could nominate themselves.
  • Can a nominee prevent a member from changing a BDBN? Generally, the answer is no. However, Family Court orders or contracts between the member and the nominee could pose potential difficulties.
  • What happens if a pre-set condition is deemed invalid? For example, when a specific asset has been nominated but is no longer owned by the fund, or when there is an undischarged bankruptcy or an insolvent estate involved.

A super fund nomination typically doesn’t take precedence over a reversionary pension. However if the reversionary pre-deceases the super fund member, then a trustee will need to examine if they can use a death benefit nomination completed by the super fund member.

Are Binding death benefit nominations a quick and cheap solution?

The original purpose of BDBNs was to make them as easy to use as a cheap will kit that can be bought from a local newsagent or over the internet. Many legal problems can arise with cheap will kits because they are easily contested.

Over time, the legal issues surrounding trusts (remember that super funds are trusts) and super and tax law have been catching up with BDBNs. As a result, it would be prudent to get some legal advice before executing a BDBNs because they need to be prepared with a great deal of care.

Super fund trusteeship upon a member’s death

Upon the death of a super fund member their trusteeship is vacated.

The super laws provide that a legal personal representative, or executor, of a deceased member will be appointed as a trustee so the SMSF won’t fall foul of the super laws. Under these laws the representative remains a trustee until the benefit begins to be paid. This appointment must be made within six months after the date of death.

In reality, this representative will be heavily involved in the distribution of the death benefit so careful consideration needs to be given as to who this person is. The process for appointing this replacement trustee must happen in accordance with the super fund’s trust deed. If a super fund has individual trustees then the trust deed often gives the members the ability to appoint a trustee.

If an SMSF has a corporate trustee then the replacement trustee will be appointed by reference to the shareholding of the corporate trustee, the constitution of the trustee and the fund’s trust deed.

Some problems that can arise are:

  • What happens if it takes a long time to appoint a representative? Or what happens if the representative has no vote in the appointment of a replacement trustee? Or if the representative is out-voted by the other continuing trustees? In all these cases, the surviving trustees have discretion in relation to the payment of the death benefit.
  • Who is the representative and when are they appointed? This depends upon the formal appointment of executor or administrator of the estate. Where there is a delay in the appointment of the executor or administrator then the surviving trustees may be left to exercise the trustee’s discretion in relation to the payment of a death benefit.

Planning for SMSF succession and the appointment of a replacement trustee is more important when there is no binding nomination and mixed families are involved.

How can death benefits be received?

Death benefits have to be paid as a lump sum or pension. They cannot be left in a super fund indefinitely.

A person defined by the super laws as a non-dependant (but still eligible to receive a death benefit) can only receive the benefit as a lump sum. Non-dependants are typically adult children of the deceased. Some older trust deeds might allow non-dependants to take a death benefit as a pension. In these situations it is important to make sure that a trustee does not allow a non-dependant to nominate that pension because, as noted above, this would breach the super laws. A person defined by the laws as a dependant can receive the benefit as one or more lump sums and/or one or more pensions (assuming the super fund’s trust permits such flexibility).

The taxation of death benefits 

It’s important to understand how death benefits are taxed, particularly because tax treatment changes depending on the status of the beneficiary. It is discussed in more detail in How your SMSF is taxed.

Severe mental or physical disability

A super fund’s trust deed should cater for the situation where a trustee can’t perform their duties due to severe physical or mental disability.

In an ideal world, a legal personal representative will be able to step in and act for the member. The appointment may happen via an Enduring Power of Attorney or it may happen because a court (typically relevant Supreme Court) will appoint someone to act on the member’s behalf.

The super laws detailing the structure of SMSFs specifically cater for this type of situation. To be effective this rule should be found in a super fund’s trust deed. When the representative is appointed as trustee they must sign the ATO SMSF trustee declaration as well as, if relevant, become a trustee director.

Without these appointments it is pretty much impossible for anything to be legally done for the member.


When a person becomes a bankrupt they can no longer be the trustee of a SMSF. They are also not permitted to appoint a legal personal representative to act for them as trustee of the SMSF. In effect, they must leave the SMSF.

If a bankrupt owns shares in a company which is the trustee of an SMSF, then the ‘bankruptcy trustee’ could gain control of that company. This means the bankruptcy trustee could exercise voting rights that attach to the shares which vest in the bankruptcy trustee.

The bankruptcy trustee could remove the bankrupt member’s directorship and appoint another person as director (there are time limits for this to be done). That new trustee is bound by normal trust law to act in the best interests of the beneficiaries.

An option for a bankrupt in this situation is to seek to make their fund a Small APRA Fund.

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