Superannuation Background Information
Contrary to popular belief, your superannuation is not automatically dealt with by your Will. You don’t own your superannuation. You may control it and have access to withdraw it, but you don’t legally own it. If you don’t own something, it isn’t yours to pass on via your Will.
Upon death, it is the Trustee of your super fund that decides who will receive your super. Under superannuation law, the Trustee of your super fund may have discretion to pay your death benefit as they see fit. Many people are blissfully unaware that their entire super may be ‘up for grabs’ amongst the dependants you leave behind.
At this stage you might say to yourself, this doesn’t apply to me, I have nominated my beneficiaries. While you may think you have your bases covered, could you be mistaken? (see Case Study below)
Two Types of Nominations
There are two types of nominations you can make with regard to payment of a death benefit; a Binding Death Benefit Nomination (BDBN) and non-Binding.
Non-Binding Nomination
A non-Binding Death Benefit Nomination states your preference and guides the trustee in making their decision, although the trustee is not bound to comply with your wishes.
Binding Death Benefit Nomination
By completing a valid BDBN you can remove trustee discretion and have a high degree of certainty about who receives your death benefit. The trustee of your super fund is bound to follow a valid BDBN and may only use their discretion in very limited circumstances (e.g. if the person nominated in the BDBN pre-deceased you).
What are the benefits of a BDBN?
A valid BDBN provides a much higher degree of certainty with regards to the payment of your death benefit (including life insurance held via your super fund). This can help make your Estate Planning more precise and effective.
Who can I nominate?
While this is a complicated and technical area due to the conditions imposed by both the ATO and superannuation law, your death benefit may generally only be paid to:
- Current or former spouse (inc. de facto)
- Any person financially dependant on you at the time of your death
- A person with whom you have an ‘interdependent’ relationship
- Child of any age (inc. Step-child)
Must I make a BDBN?
No. The decision is yours to make. Though like making a valid Will it is often highly recommended. A BDBN can be made any time prior to death.
What happens if I don’t make a binding nomination?
The Trustee distributes your benefits amongst your dependants and/or your estate in whatever way it believes is fair and reasonable. The trustee will ordinarily take into account a non-binding nomination (remember though they are not bound by your nomination unless you made a BDBN).
What if I have already named my beneficiary(s)?
Like Wills, death benefit nominations generally work on the principle that the most recently signed document overrides any previous nominations. So a BDBN made today will generally override any prior death benefit nomination you have made.
How do I make a BDBN?
Firstly you should contact your super fund and ask them whether they allow you to make a BDBN. Not all super funds permit BDBNs.
Do BDBNs expire?
Yes. BDBNs are only valid for 3 years (see note on Self Managed Super Funds below). Your superfund will usually contact you when your nomination is about to expire.
You can revoke or change your nomination at any time by completing a new BDBN.
It is important to note that if your nomination expires and is not renewed, your death benefit will be paid to your estate (i.e. be pooled with other assets you owned and distributed as per your Will).
Some lawyers claim that a BDBN does not expire in a SMSF. This area has not been tested in court at the date of writing. In any event, it is prudent for SMSF members to update a BDBN every 3 years even if the governing rules don’t expressly require it.
What happens if my BDBN is invalid?
If the trustee identifies that your nomination is invalid at the time it is submitted (e.g. not signed properly), the trustee should advise you that the BDBN is invalid.
If a BDBN is found to be invalid at the time of death (e.g. the nominated beneficiary pre-deceased you), the trustee will most likely pay a death benefit to your dependants and/or your estate.
Is there anything else I should consider?
Before making a nomination, you should consider the needs of your current and future potential dependants when it comes to distributing your assets.
In the case where a valid BDBN exists, the trustee assumes you have made your decision carefully. It does not consider the need of other dependants who are not named and it is not permitted to exercise discretion. As long as your request is legal, the trustee follows it exactly.
The payment of a superannuation death benefit can be complex. You should consult your Financial Adviser, Accountant and/or Lawyer to determine any tax and legal implications and to ensure that you achieve the optimal financial result for your dependants.
Case Study
The Supreme Court of Queensland held that a letter written by a member of a super fund to the trustee did not demonstrate an intention to make a Binding Death Benefit Nomination.
In 2006 the member wrote to the trustee (a company with him and his wife as the only directors) of his SMSF advising of his “wish” for his death benefit to be paid to the legal personal representative of his estate. The member died in 2007 leaving his wife as the remaining director of the trustee of the fund. His daughter (of a prior marriage and a beneficiary of his estate) applied to the Court for an order seeking to enforce the letter as a BDBN.
The Court found that the SMSF trust deed required a BDBN to be in ‘the form prescribed by the [SIS] Act’. As the letter was not in the form prescribed by the Act, the Court held that it did not constitute a BDBN.
The member’s wife was entitled to pay the entire death benefit (approx $1 million) to herself at the exclusion of her deceased husband’s children.
If you would like to find out more about superannuation or Self-Managed Superannuation (SMSF or Self-Managed Super Fund), please feel free to give us a call on 02 9913 9995. We are located in Narrabeen on the Northern Beaches of Sydney.
Disclaimer: This publication has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions.
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