SMFS are a great way to save for retirement, and for many individuals, their super fund is one of their significant assets that can secure their loved ones financially in case of their passing. However, it’s important to note that, unlike your family home, a super does not automatically form part of your estate and is not usually dealt with under your will.
If you want to ensure that the right people will benefit from your hard-earned super fund, then you want to make a binding death benefit nomination.
What is a binding death benefit nomination?
A binding death benefit nomination or a BDBN is a set of instructions that legally obligates the trustee of your super fund to pay your SMSF benefits to your nominees in the event of your death.
Generally, the trustee has the discretion to pay a death benefit in accordance with the governing rules of the fund and relevant laws. With a BDBN, however, the trustee is directed on how your SMFS death benefits are to be paid, either through pension or a lump sum, to your beneficiaries according to your wishes.
Note any superannuation fund (not just SMSFs) with the right trust deed can have a BDBN. The rules for large funds and SMSF differ.
Do you need a binding death benefit nomination?
A BDBN is not mandatory; however, setting up your nomination could provide certainty that your super will be given to the right individuals. A BDBN is appropriate, especially if:
● there is some doubt that your wishes will not be properly carried out upon your passing;
● there are multiple beneficiaries (e.g. blended families, children from previous marriages), a BDBN will provide clarity as to who can claim your death benefit;
● or if there is a vulnerable beneficiary involved (e.g. a disabled child).
In addition, a BDBN will provide ease and speed when it comes to the distribution of your death benefit. Your beneficiary will no longer have to wait for the trustee to determine to whom the fund will be paid out as it is already instructed in your nomination.
How does a binding death benefit nomination become valid?
For a BDBN to be valid and binding, it must meet the following requirements:
● The BDBN should be executed based on the rules in the super fund’s trust deed. For example, the trust deed must allow for a BDBN to be made and it should stipulate how it can be done.
● The nominations should comply with the super laws, where only certain individuals (e.g., your spouse) can receive the death benefit in the event of your death.
● The BDBN should be done in writing, clearly stating the proportion of the death benefit that will be paid to each nominee (with the total allocation equating to 100% of the benefit) and the type of benefit payment to be done.
● The BDBN should be dated and signed by you (the member) in the presence of two parties.
● The BDBN should be sent to and received by the trustee.
Who can be nominated in a BDBN?
The individuals you can nominate must be one or more of the following at the time of your death:
● Your spouse;
● Your child or children (younger than 18 years old, or your children who are younger than 25 years old who are financially dependent on you, or your child who has a disability);
● Any person who is financially dependent on you;
● Any person who had a “interdependency relationship” with you;
● Your legal personal representative/s.
Does a binding death benefit nomination expire?
As mentioned earlier, rules are different for SMSFs and large funds. SMSF BDBNs do not expire as long as the correct rules are in place – this is what is called a non-lapsing binding death nomination. For large super funds, BDBNs remain in effect for only three years from the date it was first signed, amended, or confirmed.
While BDBNs of SMSFs can be non-lapsing, it is advisable to review and amend them as circumstances change. For example, you may want to include your new spouse as a beneficiary along with your children from your previous marriage.
You can make changes to the nomination at any time. The trustee should be notified in writing for any amendments done on the BDBN, which is typically done by completing an appropriate form.
If a BDBN expires and is not renewed, the trustee will have the discretion on how s/he will distribute the death benefit as s/he deems fit.
Need advice setting up your binding death benefit nomination?
Much like your will, you want to carefully think about your BDBN. Remember that this nomination is binding, and you should make sure that who you choose as a beneficiary meets the criteria with tax implications in mind (e.g. adult children pay taxes on super inheritances, while spouses do not). In addition, you must ensure that all other aspects of the BDBN meet the requirements for it to be valid and your wishes are carried out.
If you need expert advice or assistance in creating a binding death benefit nomination, don’t hesitate to reach out to us and our team can put you in touch with specialist estate lawyers or financial planners who will be able to assist you.