Overview
As a large SMSF administrator we field calls on a regular basis from clients and potential clients that wrongly assume their superannuation benefit is paid according to their Will. It must be stated here in the plainest terms possible – one’s superannuation benefit does not form part of their estate. Superannuation is not an estate asset.
Who determines where superannuation is paid on death?
It is the trustee of the superannuation fund who determines where a member’s superannuation benefit is paid upon their death. Ordinarily, a Trustee’s discretion in this matter cannot be fettered, unless the member has completed what is known as a Binding Death Benefit Nomination (commonly known as a BDBN).
What is a Binding Death Benefit Nomination?
A BDBN is a direction from the member to the Trustee of a superannuation fund as to how and whom their superannuation benefit is to be paid upon their death. The form and function of a BDBN is determined by the superannuation legislation and regulations in the case of large superannuation funds, such as industry and retail funds.
When it comes to SMSFs, however, the form and function of a BDBN is determined by the fund’s governing rules, which usually means the fund’s Trust Deed. This means, in theory at least, an SMSF can have a more flexible and precise BDBN that their larger superannuation counterparts.
Who can be paid my death benefit under a BDBN?
This is something determined by superannuation law more so than the Trust Deed. Who can receive a superannuation death benefit was covered in the first article in this series, but to recap, death benefits, including those encompassed by a BDBN, can be paid to the following recipients:
- A Spouse or former spouse
- Children (regardless of age)
- Those in an interdependency relationship with the deceased
- Financial dependants
- The Legal Personal Representative (LPR) of the deceased.
The LPR of the deceased is the executor of the deceased’s estate. So, member’s wishing their super benefit to be encompassed by their Will can nominate their LPR in their BDBN. That way, their superannuation benefit can indeed form part of their estate.
Will my BDBN expire?
This was a vexed question in the SMSF industry for several years. However, in 2022, the High Court of Australia answered the question in the affirmative in the landmark Hill v Zuda Pty Ltd [2022] HCA 21 case. In the decision, the High Court concluded the superannuation regulations regarding BDBNs (such as requiring two independent witnesses and lapsing after three years) do not apply to BDBNs in SMSFs, unless the fund’s Trust Deed stipulates they do apply.
This provides some of the key benefits regarding estate and succession planning in SMSFs compared with large, industry and retail funds.
Advantages of a BDBN
To expand on this point, there are some key advantages of having a BDBN, especially in the content of an SMSF:
- Greater certainty and control – a BDBN can remove the discretionary decision a Trustee makes with a member’s death benefit.
- Time saving in the payment of benefits – without a BDBN, a Trustee may be required to undertake a rigorous process to determine to whom and how much of the deceased’s benefit is to be paid to beneficiaries.
- Minimises conflicts and legal fees – often disputes arise where an SMSF member does not have a valid BDBN, with numerous Case Law examples showing just how erroneous death benefit payment can get.
Disadvantage of a BDBN
Whilst often beneficial, BDBNs are not a panacea for all superannuation estate planning matters:
- They are not infallible – if a Trustee chooses to ignore a valid BDBN, things can still go awry. The adage “possession is nine-tenths of the law” often applies in death benefit disputes
- Inflexibility – often family dynamics change, such marriage breakdown, which may mean a BDBN needs to be replaced to reflect a change in member circumstance
- Must be executed correctly – again, there is Case Law that shows what can go wrong if BDBNs are not executed properly, leading to undesirable outcomes and expensive legal fees.
Conclusion
Given superannuation is not an estate asset, BDBNs can be a way to direct SMSF Trustees to pay benefits in line with member’s wishes. This can include directions to pay super death benefits to the deceased’s LPR, effectively ensuring death benefits can be distributed per the deceased’s Will. However, care needs to be taken to ensure they truly reflect the current wishes of the member. Broader estate and succession matters also need to be carefully considered, to ensure those controlling the fund are going to follow the deceased’s wishes.
What does Neo Super provide?
We are an innovative end-to-end SMSF service provider specialising in:
• SMSF administration and compliance
• Documentation services, including fund establishment, borrowing arrangements and pension documentation
• White label documentation and services for Intermediaries such as accountants and financial planners
• SMSF technical support, education, and training.
Further Information
For other service requirements, please contact our office at neo@neo-super.com.au or 1300 083 428.
