Ever wondered what happens in the unfortunate event of a member in an SMSF passing away? There are a few different paths that the benefits can be directed to, one of which is a death benefit being paid out.
A binding death benefit nomination (BDBN) is a written direction to the trustee of an SMSF that sets out the dependents and/or legal representative that a member wishes to pay their benefits to in the event of death.
If a binding death benefit nomination is in place and valid at the date of death, the trustee is legally bound to pay the deceased members benefit to the nominated beneficiaries set out in the nomination. A BDBN can be made at any time, the value being a member will great certainty as to where their superannuation benefit will be disbursed upon death.
A dependant includes:
a spouse (includes de facto);
a former spouse;
a child aged less than 18;
any other person with whom you had an ‘interdependency relationship’ with just prior to death; or
any other person who was a dependant of you (i.e. relied on you for financial maintenance) just before you died.
How to ensure the binding death benefit nomination is valid?
Nomination is in favour of one or more dependants and/or legal personal representative
Each dependant nominated must be a dependant at the date of the members death
Allocation of benefit among the beneficiaries must be clearly documented
100% of benefit must be allocated. Entire nomination will be invalid if allocation does not equal 100%
Nomination must be signed and dated by the member in the presence of two witnesses, both of whom are over age 18 and NOT nominated to receive benefit, and
Nomination must contain a declaration signed and dated by each witness stating the notice was signed and dated by the member in their presence
BEWARE – A common misconception that can be a trap for SMSF’s is that a Will covers superannuation benefits. This is not the case and has caused headaches for those unaware. The trustees of the SMSF will pay death benefits according to a valid BDBN, or in the absence of same, to a dependant beneficiary at their discretion (which can cause all sorts of headaches as illustrated in Katz V Grossman)
Many BDBN’s nominate only one person as a simple approach, generally the spouse. But what about if the nominated beneficiary predeceases the member making the nomination? For example, a couple can nominate their two children as the binding death benefit nominees to split the benefits equally. However, if a nominated beneficiary, in this case the children, predeceases the member and has children of their own, these grandchildren are generally not considered ‘dependents’ for super purposes. A benefit that is supposedly directed to the grandchildren in these circumstances will fail unless it is paid to the members estate to be dealt with in conformity with the members will.
BDBN v Reversionary Pension?
The great debate. What option takes precedence? Well, the governing rules of a superannuation fund takes precedence. This will generally clearly set out how benefits should be dealt with upon death. Where a reversionary pension is in place, a binding death benefit nomination can still be utilised when:
The nominated reversionary beneficiary predeceases the member – meaning the reversion cannot go ahead and the BDBN will apply
The member has superannuation interests in addition to the reversionary pension (eg accumulation phase or non-reversionary pensions) – the BDBN will apply to these other super interests
The nominated reversionary beneficiary is not eligible to receive the pension benefit – the BDBN will apply