What happens to Super when you die?
A common myth is that on death super must be paid to your estate. Super benefits can be directed to your estate but is not automatically paid to your estate. With a self-managed super fund (SMSF) you control how and to whom your super is paid as part of the SMSF Estate Planning process.
Consider who you want your super to go to when you die. As super is not automatically paid to your executor you can direct your SMSF trustee to pay your super death benefit payment to one of your SIS dependants or to your legal personal representative (LPR).
The beneficiary appointed has to be a SIS dependant such as a current spouse or de facto, a child of the member (including adult children), or a person in a financial dependent or interdependent relationship with the member. The SIS rules also allow a death benefit to be paid to the member’s “legal personal representative” which is often the executor of the member’s will.
How can you control where your super goes?
Consider the following:
- nominating a reversionary pension beneficiary
- making binding death benefit nominations (BDBN)
- who will be making decisions about your super benefits?
Nominating a reversionary pension beneficiary
When starting an SMSF income stream, members can nominate a reversionary pension beneficiary to automatically continue the pension upon their death. This nomination can sometimes be changed or added before the member passes away. The SMSF trustee must review and confirm valid nominations.
Choosing a pension beneficiary allows the pension to revert seamlessly during a difficult time, giving the beneficiary 12 months to manage their transfer balance cap (TBC). However, electing a reversionary pension beneficiary restrict options for distributing death benefits, as only the reversionary pensioner receives the pension, whereas trustees could otherwise allocate lump sums or pensions to dependants with varying tax outcomes.
Hint – A reversionary pension beneficiary must be a SIS dependant eligible to receive a pension, typically the member’s spouse. Adult children are not eligible for a death benefit pension. Reversionary pensions are less likely to be contested and usually override a BDBN. Always consult your SMSF trust deed for clarification on death benefit payments.
Binding Death Benefit Nomination (BDBN)
A BDBN is a formal direction you make to the SMSF trustee which is binding on them.
What are some pitfalls when drafting a BDBN?
The BDBN may not be valid if it is not drafted correctly or not signed correctly or dated. A SIS dependant determines who you can pay your super to. There have been court cases where the nominated beneficiary was stated as “The Estate of the Member” or “Trustee of Deceased Estate” which were found to be invalid. If the intended beneficiary is your estate, the nomination should align with the SIS legislation which is the “legal personal representative” of the member. The details matter.
A common pitfall is the SMSF trustee not being given the BDBN. It is best if all trustees acknowledge the receipt and acceptance of the BDBN from the member. If the trustee is a company, the BDBN must be served on the trustee. It is generally accepted that being served means the BDBN has been left at the registered office or posted to the registered office of the trustee company.
Check your trust deed
A BDBN must comply with the fund’s trust deed regarding execution, validity, and acceptance. The deed may specify a nomination form or could merely be prescriptive. An SMSF trustee A BDBN must comply with the fund’s trust deed regarding execution, validity, and acceptance. trustee cannot have its powers fettered by exercising their discretion in advance. A trustee has a discretion to pay a super death benefit payment after the death of a member, and the trustee’s decision cannot be made before the event has occurred. However, if the trust deed includes an express power directing the trustee to pay a death benefit payment in accordance with a BDBN the trustee must follow that direction unless the BDBN is invalid.
Can a BDBN be non-lapsing?
Yes, it can, but you must check carefully whether your trust deed allows this. Some deeds use wording from regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994, which provides, apart from other rules, that a valid BDBN will lapse after three years. The High Court has clarified that an SMSF trust deed determines how superannuation death benefit nominations are managed, and reg 6.17A only applies to SMSFs if its wording is included in the fund’s trust deed. If a BDBN is set up as a non-lapsing nomination but the deed includes wording from reg 6.17A, the nomination will lapse after 3 years.
Update and Review Your BDBN
Over time, a member’s personal circumstances may shift due to family conflicts, separation or divorce, the loss of relatives, or remarriage that introduces additional family members. It is essential to conduct an annual review of your BDBN to confirm that your intentions are accurately reflected and remain legally valid.
Who will be making decisions about your super benefits?
As a member of an SMSF is also an individual trustee or a director of the corporate trustee their death impacts who controls the fund. The superannuation trustee determines who receives the super death benefits of a member. However, as discussed above the trustee has no discretion if there is a valid BDBN in place or a reversionary pension beneficiary. There are many court cases involving disputes about the payment of death benefits and a lot of money lost contesting the validity of a BDBN.
Non-binding death benefit nomination?
A trustee has a discretion to pay the deceased member’s death benefit to a beneficiary, provided they are a SIS dependant or the member’s LPR. The trustee considers the member’s wishes, potential beneficiaries and the member’s will, but makes the final decision independently. A written non-binding death benefit nomination is a way of letting the trustee know what your wishes are.
Who is in control?
- Ultimately the last person standing will control how and whom death benefits are paid to – your wishes, even if locked down in a valid BDBN, may be ignored resulting in protracted and costly legal battle for your beneficiaries so it is crucial you ensure you can trust the remaining trustee to carry out your wishes.
Consider the following scenarios:
- The sole member dies and controls goes to the 2nd individual trustee – can you trust them to follow your wishes?
- The sole member dies and the trustee was a corporate trustee – who is running the company? Who can appoint a new director? What does the company’s constitution say? If the constitution says the majority of the shareholders appoint a new director – what happens if the only shareholder is the deceased SMSF member?
- Mum and Dad SMSF and dad dies – the SMSF has a corporate trustee and the constitution provides the majority of shareholders can appoint a new director – who inherits the deceased shareholders shares and can you trust that person to appoint a new director who will carry out your wishes? How long will probate take before the new shareholder can be determined?
- The executor of the member’s will does not automatically step in as the trustee or the director of the corporate trustee – SIS rules allow an executor to step in but they still must be properly appointed which is subject to the fund’s trust deed and if the trustee is a company, subject to the company’s constitution.
- At what point does the membership of the deceased end?
Different deeds provide various scenarios – some say the membership ceases on death, some say it ceases when the death benefit starts to be paid and others say it ceases when the death benefits are fully paid out. Why does this matter?
Take the example of Ted and Sheree. They have their own SMSF and both are the directors of the fund’s sole purpose corporate trustee. Ted dies – the fund’s trust deed provides that the fund’s membership ceases on death. The company constitution allows Sheree to carry on as a sole director. There is now a sole member and a sole director corporate trustee and Sheree controls all of the decision making.
To learn more about the Death of an SMSF Member checkout the page below: