7 questions about Binding Death Benefit Nomination

Last Updated: Jan 05, 2015

The opportunity of legal challenge is dramatically reduced when Death Benefits are not paid or payable to the Legal Estate of a deceased Member by the Trustee of a Complying SMSF but directly to a beneficiary as specified by the deceased Member. The payment of superannuation Death Benefits are not subject to the provisions of the Member’s Will. Accordingly, a nomination can be of major strategic value to the Members of a Complying SMSF. 

A properly drafted Binding Death Benefit Nomination allows the Member to direct the Trustee as to how their Death Benefits are to be distributed and in what form such as a pension or a lump sum. Additionally, it can direct the Trustee as to who the deceased Member’s Replacement Trustee is to be.
In accordance with the Trustee’s discretion, the Trustee can accept all or part of the Member’s Non-lapsing Binding Death Benefit Nomination (“BDBN”). This is subject to the availability of the Member’s Superannuation Interests, the Superannuation Laws and the Rules of the Fund.
 
The Non-lapsing Binding Death Benefit Nomination may become, subject to the Trustee’s consent a Special Rule of the Fund.

Important Note: the trust deed of the fund must provide the relevant form and requirements for the Trustee to accept a complying non-lapsing BDBN.  For example if the trust deed refers back to the laws relating to BDBNs for retail and industry superannuation funds in SIS Regulation 6.17A then any BDBN lapses after 3 years. The commentary below relates to the NowInfinity SMSF trust deed and non-lapsing BDBN documentation and is for accountant, adviser and trustee use only. 

 

1) Who can I nominate as a Beneficiary of a BDBN?

You can nominate your dependants and/or your Legal Personal Representative (which transfers any nominated death benefits to your estate) as a beneficiary under the sole purpose test in section 62 of the SIS Act 1993.

The dependants of a member are:
 
·         The spouse of the member. Spouse includes:

         - a person with whom you are legally married, 
         - a person (whether of the same sex or a different sex) with whom you are in a relationship that is registered under a law of a State or Territory, and 
         - a person who lives with you on a genuine domestic basis in a relationship as a couple.
 
·         Any child of the member. Child includes:​

         - an adopted child, a stepchild or an ex-nuptial child of the member
         - a child of the member's spouse, and
         - someone who is a child of the member with the meaning of The Family Law Act 1975.
 
Note: An adult child, non-financially dependant, can be nominated, however adult children are not “tax dependants” under tax law so their nomination may not be tax effective unless the child concerned is disabled.
 
·         Any person (whether or not related by family) with whom the member has an interdependency relationship.​
 
·         Any person who is financially dependant upon the member.  The question of financial dependency has been considered in a number of cases including Maleks case and Faull’s case.  It is not a requirement for the dependant person to be wholly dependant upon the member but financial dependency will need to be reviewed at the time of a member’s death. 

By nominating your estate as the beneficiary you can effectively distribute your superannuation benefits to people who are not considered dependants for the purposes of superannuation. 

Note: The death benefit nomination will not be binding on the trustee to the extent that it nominates a person who cannot receive a benefit in accordance with the superannuation Laws.
 

2) How many beneficiaries can I nominate?

As many as you wish as long as they are dependants or a Legal Personal Representative and the total of all nominations equals 100% of your superannuation benefits.  There are some instances on where the Trustee of the Fund may pay out an anti-detriment benefit to a dependant or your legal estate which provides a significant tax advantage for the fund and its on-going members.  If you would like to know more you can search on our Support Centre or ask your Fund adviser about establishing an anti-detriment benefit.  These are additional benefits to the deceased member’s superannuation benefits and may be included in a BDBN if the Trustee of the Fund agrees.
 

3) What is the difference between a lapsing or non-lapsing BDBN?

The ATO has confirmed that the regulations imposing the 3-year renewal are not applicable to SMSFs. If the governing rules allow for a non-lapsing binding nomination you can make a binding nomination that does not have to be renewed. The BDBN when used with the NowInfinity SMSF governing rules is non-lapsing and binds the current and future trustees of the fund. The BDBN will remain valid until such time as the member revokes it. This may not be the case with other trust deeds and the BDBN documentation is specific to the NowInfinity governing rules.
 

4) Can I amend a BDBN or revoke a BDBN?

You can amend or revoke a BDBN at any time. To amend the BDBN you must complete a new BDBN. It should be noted that a BDBN may remain in effect even if your personal circumstances have changed. Thus it is important to review your BDBN at least annually to ensure it continues to reflect your wishes.

You can revoke a BDBN at any time by written notice to the Trustee signed and dated by the member.
 

5) Who can witness the BDBN?

The signature and single witnessing requirements are as described under the NowInfinity deed.  If you are using the NowInfinity SMSF deed then only one signature is needed – whereas a number of other deeds will require two or in some instances no witnessing.  Just be careful with your deed.  The SIS Regulation 6.17A dealing with BDBNs requiring two witnesses does not apply to SMSFs - it is the trust deed that counts according to the Commissioner of Taxation.

The BDBN has to be witnessed by an independant witness who will not benefit from the nomination and who is not a fellow trustee or director of the trustee company plus is at least 18 years old.
 

6) Can an a person holding my enduring power of attorney sign my binding death benefit nomination on my behalf?

An attorney holding an Enduring Power of Attorney can make, amend or revoke a BDBN on your behalf provided the EPOA does not limit his powers in that regard.  However great care should be taken to ensure that the EPOA correctly states the limits of the attorney’s powers in relation to all superannuation matters.
 

7) What happens if at the time of my death I don’t hold a Binding Death benefit nomination?

The Trustee has sole discretion, subject to the Superannuation Laws, to pay the member’s superannuation benefits as one or more lump sum or income stream or a combination of both to the deceased member’s dependants, Legal Personal Representative or Legal Estate or any other persons authorised by the Superannuation Laws.

Note: The trustee is not bound by any member’s non-binding death benefit nomination.
 

Examples from Commissioner’s Ruling SMSFD 2008/3

Example 1

28. In 2004 Jen, a member of an SMSF, makes a valid binding death benefit nomination in the form required under the governing rules of the SMSF. The nomination made by Jen requires the SMSF trustee to provide the whole of any benefit payable in the event of her death to Seth to whom she was married at the time. Under the governing rules of the SMSF a member's binding death benefit nomination remains valid for five years from the date received by the trustee.
29. In 2006, Jen and Seth divorce.
30. Jen remarries in 2008 but dies later that year. At the time of death the nomination made by Jen in 2004 had neither been revoked nor amended.
31. The SMSF trustee is not required to follow the death benefit nomination which Jen made in favour of Seth. While the death benefit nomination was made in accordance with the governing rules of the SMSF, Seth, no longer being Jen's spouse, had ceased to be a dependant of Jen for the purposes of the SISA and SISR. Therefore, payment of a benefit to the nominated person would contravene the operating standards of the SISA.
32. As such, the payment of Jen's death benefits becomes subject to the discretion of the SMSF trustee.
33. In this regard, the SMSF trustee must comply with regulation 6.22 of the SISR and not, subject to limited exceptions, cash the death benefits in favour of a person other than the executor of Jen's deceased estate or any dependants of Jen.

Example 2

34. Tom is a member of an SMSF and has provided the trustee with a written death benefit nomination made in accordance with the governing rules of the fund. The nomination directs the SMSF trustee to pay Tom's death benefits to his nephew Cameron.
35. Tom dies in July 2008 and is survived by his spouse, the other member of the SMSF. At the time of Tom's death Cameron was financially independant and living in his own flat.
36. Cameron is not Tom's dependant and falls outside the range of persons to whom Tom's death benefits can be cashed in accordance with regulation 6.22 of the SISR. This is because regulation 6.22 restricts, subject to limited exceptions, the recipients of death benefits to the dependants and personal legal representative of the deceased member.
37. As Tom's nomination is not valid due to the operation of section 55A, it is not binding on the trustee. As such the payment of death benefits is a matter for the discretion of the trustee acting in accordance with the governing rules of the SMSF and the requirements of legislation including the SISA and the SISR.

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