Binding Death Benefit Nominations (BDBNs)

When a member dies, an SMSF trust deed along with a valid binding death benefit nomination will both serve to determine who a member’s benefit will be distributed to.

In the recent decision of Ioppolo & Hesford v Conti [2013] WASC 389, we are reminded of the importance of ensuring measures are in place to enable a member’s benefit to be distributed in accordance with that member’s wishes.

In this case, a husband and wife were the members and trustees of an SMSF. The wife died, leaving the husband as the sole trustee until a company was appointed as the trustee. As there was no BDBN, the husband was able to pay the deceased’s member benefit to himself. This was despite the wife’s will providing that her benefit was to be paid to the children, and not the husband.

However, despite this reminder, it is not always the case that a BDBN is actually necessary. Depending on a member’s circumstances, it may make sense to allow the trustees to have flexibility to pay the benefit to the member’s residuary estate in order for it to be distributed in accordance with the will or to instead decide to pay it directly to superannuation dependants.

Do you need a BDBN? Factors to weigh up

As to whether a BDBN is truly necessary depends on the facts at hand. Several factors need to be considered:

  • how a recipient will be taxed;
  • desire to retain flexibility in distributing an estate;
  • types of assets which comprise an SMSF;
  • changes to super law; and
  • who will be left to make decisions about the benefit.

How are benefits taxed?

How the end beneficiary of a BDBN is taxed is one important factor in determining whether a BDBN is a good idea. For example, leaving a death benefit for a child who is a tax dependant might seem to make sense, at least from a tax perspective. However, if the child is no longer a tax dependant at the time of death, the tax planning will effectively be undone.

Retaining flexibility

As to whether a BDBN is a good idea depends on the circumstances of the parties in question.

Situations where a BDBN may be overly restrictive

It may be that a testator wishes to provide flexibility in distributing the estate, and enable a superannuation death benefit to be distributed in a way that is consistent with the broader estate planning objectives. This is especially the case if there is no need to counter conflict between family members. In those instances, a BDBN might be considered too restrictive.

As a side note, an SMSF member may wish to maintain equality between adult children through ensuring that their respective children receive their benefit in equal proportions. In such a case, a potential strategy is that a benefit can be paid into testamentary discretionary trusts, effectively constituting “multi-stage nominations”, in order to benefit children of a deceased adult who was to receive a benefit.

Situations where a BDBN serves a useful estate planning tool

Where estate assets are likely to be subject to a claim by various family members, for instance in a blended family scenario, a BDBN allows for strong protection of a member’s benefit.

So, for example, a family member might create a BDBN in favour of various children, but excluding a particular child. Subsequently, assets are placed into the SMSF that would otherwise fall into the estate. However, this strategy may not work in New South Wales where the notional estate of the fund member can include a superannuation benefit.

What assets does your fund contain?

Thought should be given as to whether an obligation to pay a benefit will be able to be easily funded. In some cases, a self managed superfund may contain only one large asset. For instance, this could be in the case where real estate was acquired by a super fund under a limited recourse borrowing arrangement.

In such a case, whilst the rent derived from the property may be sufficient to cover a pension payable to a spouse of the deceased, difficulties may arise as to how a death benefit can be paid to an adult child of the deceased where a lump sum would need to be paid.

An illiquid fund may mean that the trustee is not able to cash out a death benefit without liquidating the fund’s assets, normally at a price which is below market value.

Uncertainty in superannuation laws

Considering the potential for changes to the law in respect of taxation of pension streams, it may be worthwhile choosing not to have a BDBN in place, and instead opt for a non binding nomination.

Alternative – Automatic Reversionary Pension

As an alternative to a BDBN, an automatic reversionary pension (ARP) could be considered. Under an ARP, the pension payments will continue to be paid with no requirement to be updated as is the case with BDBNs.

Final tip – monitor any changes to the super fund trust deed

Super fund trust deeds are frequently replaced on a wholesale basis. Oftentimes little regard is given to the interaction of the clauses of the new replacement deed and any pre-existing BDBNs which may have been in place.

Regardless of the above points raised, it is important to consider what effect, if any, the replacement of terms of trust does to the validity of BDBNs which have been established, prior to the amendment, as an amendment may render the nomination invalid unintentionally.