When it comes to saying goodbye to loved ones, the last thing you want to be doing is catching-up your knowledge on financial and legal obligations. Having a basic understanding of how a superfund is managed when you or your partner passes away means you can plan ahead and ensure that the death benefits of your fund will be distributed properly.

Superannuation benefits do not form part of your deceased estate.  Thus, upon your death, the trustee of a superannuation fund must decide how to disburse your entitlements in the Fund.  The payment of any benefit by the trustee in respect of a deceased member is known as a death benefit payment.

Recipient of Death Benefits

In general the trustee has complete discretion to decide how and to whom any death benefits will be paid.  The only limitation is that they must be paid to one or more of the member’s dependants or legal personal representative/s.

Who is a Dependant?

A dependant under the superannuation law includes:

• a spouse (legal or defacto),
• any child, irrespective of age or financial circumstances, or
• someone with whom the member had an interdependent relationship.

An interdependent relationship is generally one in which 2 people (whether related or not):

• have a close personal relationship; and
• they live together; and
• one or each of the provides the other with financial support, and
• one or each of them provides the other with domestic support and personal care.

Interdependency may still exist where the above conditions would be met except for medical or physical reasons that causes the individuals to live apart.

Who is your Personal Legal Representative?

Upon death your legal personal representative will be either the executor of your will, if you have one, or the administrator of your deceased estate.

Member Choice – Death Benefit Payments

While the superannuation law allows the trustee to decide on death benefit payments, the trustee powers are further governed by the fund’s trust deed.  Many funds have deeds that allow members to elect where their death benefits are to be paid.  The options available and method of nomination depends upon the specific deed of each fund.  In general, the options are:

No Nomination – a member is not obliged to make a death benefit nomination.  In these circumstances, the trustee has complete discretion in respect of the distribution of your benefits.

Preferred Beneficiary/Non-Binding Nomination – a member may indicate the preferred recipient of their benefits on their death.  However, this nomination is not binding on the trustee.  While the trustee may take your wishes into account, they still have complete discretion in respect of the distribution of your benefits.

Binding Death Benefit Nomination (BDN) – as the name suggests, this is a nomination of a beneficiary of your death benefits that is binding on the trustee provided it meets the legislative & deed requirements.  That is, this nomination overrides the trustee’s discretion with respect to payment of your death benefits.  The trustee must pay your death benefits in such proportions and to the dependants or legal personal representative that are noted in the nomination, to the extent it is valid.

Some deeds allow a BDN to be non-lapsing, meaning it continues until revoked in writing.  In contrast, other deeds specify that they lapse after 3 years.  A lapsed BDN is no longer binding on the trustee.

Under all nomination types, it is considered prudent to have these regularly reviewed by the member to ensure the nomination in force still meets their desired outcome.

Making a Binding Death Benefit Nomination

To be effective, a BDN must be made in accordance with the terms of your fund’s current deed.  Deeds vary greatly on the process involved, but generally the following applies:

1. It must be made in writing and signed & dated by the member
2. It must specifically state it is a binding nomination
3. The nominated individuals must be dependants (as discussed above)

Failure to adhere to the specific requirements of a fund’s deed in every respect renders a nomination invalid.

Where your fund’s deed requires the BDN to be witnessed, these witnesses must be over age 18 and cannot be beneficiaries nominated in the BDN.

ADVANTAGES

• A trustee must comply with a valid BDN.  This provides certainty both for the member and the beneficiaries as to how and where the death benefits are to be paid and the likely tax implications.
• Protection is provided to the individual as trustee and/or beneficiary against a conflict of interest claim, should the estate be challenged.

DISADVANTAGES

A trustee must comply with a valid BDN.  If circumstances have changed, but the death benefit nomination has not been updated, the trustee is still obligated to comply with the latest valid nomination held.  This may mean:

• a more tax effective distribution option might otherwise have been available
• beneficial law changes are not taken into account
• contingency plans are not effective
• the BDN conflicts with the latest Will of the deceased

A trustee cannot pay a death benefit to a non-dependant even if nominated in a BDN.

It feels good to get your affairs in order to ensure the future of your family and loved ones – and for you. While estate planning is the end of your journey, there is much to be enjoyed when you structure you SMSF correctly. Speak with one of our SMSF specialist accountants and enjoy an equitable retirement knowing the financial future of your loved ones is secure.