If you prepare Binding Death Benefit Nominations (BDBNs) for clients, you need to take note of the decision in Munro v Munro. In that case the BDBN was prepared by accountants, and the process was overseen by the deceased’s financial planner. The deceased himself was a lawyer.
Using the wrong terminology when directing a benefit to the estate
The BDBN nominated the “Trustee of Deceased Estate” as the beneficiary. The BDBN form and the trust deed required nominations or payments only to a legal personal representative (LPR) or a dependant, consistent with the requirements of theSuperannuation Industry (Supervision) Regulations 1994 (SISR). Her honour Justice Mullins found that the nomination of the “Trustee of Deceased Estate” was not valid because it did not nominate either the LPR or a dependant. The Trustee of a Deceased Estate is not the legal personal representative. Whilst often the terms “trustee”, “executor”, “administrator” and “legal personal representative” are used interchangeably, this case demonstrates the importance of the precision needed in this area. Even if the superannuation trust deed and BDBN form had been silent about who could be nominated, the nomination of the “Trustee of Deceased Estate” was not valid because regulation 6.22(2) SISR requires death benefits to be paid to “the member’s legal personal representative” or “one or more of the member’s dependants” (or a combination). The nomination did not nominate someone to whom the benefit could be paid under the regulation. It meant that the death benefit was not subject to a BDBN and the discretion to determine how the benefit was to be paid was then to be decided by the deceased’s second wife and stepdaughter as trustees of the fund, rather than having the death benefit form part of the estate and pass, in part, to the deceased’s daughters from his first marriage.
SMSFs may be subject to SISR requirements for BDBNs
The case also noted the known risks about the interaction of Self-Managed Superannuation Fund (SMSF) deeds that require the BDBN to satisfy the SIS requirements. Whilst Munro supports the Tax Commissioner’s view that sections 59(1) and 59(1A) of the Superannuation Industry (Supervision) Act do not apply to SMSFs, and therefore the requirements in regulation 6.17A also do not apply (i.e. the requirements relating to BDBNs for non-SMSFs), the decision supports the view reached in the other notable Queensland case of Donovan v Donovan that the SMSF Trust Deed may import those requirements. However, whereas in Donovan the relevant fund required its BDBNs to satisfy the “Statutory Requirements” and therefore required compliance with the requirements in regulation 6.17A, in Munro the deed required BDBNs to comply with “Relevant Requirements” which were defined as requirements the trustee or the deed must comply with in order to avoid contraventions or to qualify for concessional tax treatment. Regulation 6.17A does not fall into any of those requirements, so the upshot was that regulation 6.17A did not apply to the BDBN in that fund.
Despite Donovan in 2009, the Tax Commissioner’s views expressed in Self Managed Super Funds Determination 2008/3, and most practitioners accepting for some considerable time before that the non-application of sections 59(1) and 59(1A) SIS to SMSFs and their BDBNs, we still see instances of SMSF trust deeds requiring BDBNs to satisfy the SIS requirements. Munro reinforces the need for advisers to consider the terms of their trust deeds and BDBN forms to ensure that those requirements are not automatically imported. Indeed, our preference is for the deed to contain express provisions allowing for arrangements which might otherwise be contrary to the SIS and SISR BDBN requirements. For example, our trust deed explicitly allows a BDBN to be non-lapsing, and contains no requirement that the trustee have notice of the nomination prior to the member’s death.
The need to review and be precise
The case highlights the need to:
- Have a deed which does not require the SIS BDBN requirements to be satisfied
- Read and comply with the deed
- Read and comply with the BDBN
- Use the correct terminology on the BDBN when directing a benefit to the estate