SMSF Death Benefit Nominations

Death Benefit Nominations in a SMSF

Binding Death NominationsWhen a member of an SMSF dies their benefits do not automatically form part of their estate and paid out in accordance with their will. This is one of the biggest myths when dealing with the death of a SMSF member.

The trust deed governs how a member’s benefit is paid out. Read your trust deed to find out how the member’s death benefits should be dealt with. Reviewing and updating the trust deed is important when considering estate planning and drafting a BDBN or a death benefit agreement.

It is crucial to plan. You want assurance that your benefits will be managed according to your wishes, not based on assumptions.

Advice should be obtained from your SMSF specialist and your estate planning lawyer before entering into a death benefit nomination, agreement or a reversionary pension nomination.

How does the Trustee Decide who a Member’s Death Benefit can be Paid to?

A death benefit can be paid based on a member’s wishes or at the trustee’s discretion.

A member can make their wishes known to the trustee by electing a death benefit nomination which can include the following options:

  • A non-binding death benefit nomination (NBDBN)
  • A binding death benefit nomination (BDBN)
  • Reversionary pension beneficiary nomination (RPBN)
  • Death Benefit Agreement (DBA)

The trustee has a discretion to nominate who the death benefit will be paid to unless a valid and legally binding member nomination, election or agreement has been made.

The trustee is not able to have its decisions fettered. This merely means nobody else can make decisions about the fund except for the trustee UNLESS the governing rules specifically allows this to happen.  Generally, a trust deed has a discretion built in to allow a member to decide who their death benefits can be paid to and to elect a reversionary pension beneficiary.

A member’s death benefit can be paid to their estate BUT only if the trustee decides to pay the benefit to a member’s estate after consideration of the member’s death benefit nomination or other factors such as your will, dependants and any other wishes the member has previously expressed.

Non-Binding Death Benefit Nomination (NBDBN)

The NBDBN merely expresses a member’s wishes, and the trustee will have the final discretion as to whom the member’s benefit will be paid to.  A NBDBN is a formal written request made by the member to the trustee and is non lapsing. The wording is not directing but just letting the trustee know who the preferred beneficiary is.

The risk with a NBDBN is that the trustee has the ultimate discretion to payout the death benefit.

Example -a fund includes a family group with a couple of children, their father and stepmother.  Combined the two children will have the majority say in the decision making to payout the death benefit despite the stepmother having a much higher member balance. The power in the fund is skewed to the children despite their minor balances.  The children could decide the stepmother is excluded from receiving any part of their father’s death benefits, especially if they are antagonistic towards her.

Binding Death Benefit Nomination (BDBN)

A member who wants certainty over the beneficiary receiving their death benefits can make a BDBN. The nomination is based on the requirements of the trust deed. There are many templates available to make a BDBN.  However, it may be invalid if it is not in the format dictated by the trust deed.  A lot of trust deeds provide a template which may not necessarily meet the requirements of the trust deed.

Advantages of a BDBN can include nominating how the benefit is to be directed ie. lump sum or a pension which is particularly useful for tax planning as well as utilising pension caps.

Risks with using a BDBN include bad drafting or execution as well as a situation where a member’s relationship changes, and the nomination is not updated, or the member loses capacity and is unable to update a nomination. Unintentionally, the member’s super can end up in the wrong hands.

Example – Mr Biggs second wife, Vera, was the trustee of their shared SMSF when he unfortunately passed away.  Mr Bigg nominated “Trustee of Deceased Estate” as his beneficiary in his BDBN thinking his death benefit would be paid to his estate and distributed to his children in accordance with his will.  However, the correct terminology is “Legal Personal Representative” as defined in the superannuation legislation.  Mr Biggs BDBN was invalid which allowed Vera to use her trustee discretion to pay Mr Biggs death benefit to herself. His children missed receiving their share of his super benefits.

Reversionary Pension Beneficiary Nomination (RPBN)

Due to restrictions on who can receive a pension on death a RPBN is generally limited to a spouse or a child under 18. A nomination can only be made on a pension account and thus a separate nomination for each pension is required. The terms and conditions of a pension are established at the beginning of the pension.  A RPBN is usually included in the original pension terms.

It is possible to add in a reversionary beneficiary after the pension has been going for some time.  However, there must be a clause in the trust deed allowing the member to direct the trustee to do this. It must also be acknowledged by the trustee, the RPBN must be in existence prior to the member’s death, it must be clear that the pension is bound to be taken as an automatic ongoing pension and the pension beneficiary is clearly identified.

It is possible to include a reversionary using a BDBN.  However, the wording must be unambiguous about reverting the pension to a beneficiary without any trustee discretion being used in relation to the form of the benefit.

Death Benefit Agreement (DBA)

This is an agreement between a SMSF member and a SMSF trustee which forms part of the trust deed. It will not lapse until it is revoked or replaced by the member.  A DBA is as good as it is drafted and can have similar benefits and risks of a BDBN. It must be supported by the fund’s trust deed which generally needs to be updated when a DBA is being contemplated.

 It is usually more costly than a BDBN. A DBA was introduced to eliminate uncertainty about binding a SMSF trustee to payout a member’s benefits on death to a nominated dependant beneficiary which is non-lapsing. The law on making a non-lapsing BDBN is now settled but was unclear for several years.

Legal Compliance in relation to BDBN

A myth around a BDBN is that is must be structured in accordance with Regulations 6.17A which generally apply to large funds and not a SMSF. 

The regulations provide that a BDBN include, but not limited to the following:

  • it is a lapsing nomination, up to 3 years maximum
  • It must have two witnesses to evidence the member’s signature and dating of the nomination
  • The witnesses must be over 18 years of age who also sign and date the nomination
  • only permitted beneficiaries are SIS dependants and the Legal Personal Representative
  • the BDBN must be in writing

A SMSF is not legally required to structure a BDBN to include the above. The trustee of the SMSF must prepare a BDBN in accordance with the fund’s trust deed.

A SMSF can accept direction from fund members where the trust deed allows the trustee to be directed in relation to the death benefit nominations.   

TIP – If the trust deed of the fund is not well-written, it might include language from the regulations that mandates the BDBN be prepared in accordance with Regulation 6.17A or be included as part of a “general deeming clause.” This means the BDBN might need to include, amongst other things, a provision for it to expire after 3 years, with two witnesses signing and dating the nomination.

What Death Benefit Nomination takes Precedence?

The trust deed determines the order in which a death benefit must be paid. A RPBN usually takes precedence as it is an automatic transfer of an existing pension to the nominated beneficiary.  The trust deed should ensure this is clear and unambiguous. The governing rules should provide the order after the reversionary pension beneficiary has been considered to include firstly the DBA followed by the BDBN and then the NBDBN.

Review the Death Benefit Nominations and Reversionary Pension Beneficiary Nominations

Review and update the death benefit nomination regularly.  Unintended consequences could see benefits being paid to a former spouse or some other unwanted beneficiary.

Control of the SMSF

It must be remembered that the trustees control and make decisions regarding the payment of death benefits if there is no valid BDBN, DBA or RPBN.  It is crucial to know who the trustees will be on the death of a member.  Control can impact on whom the payments are made to. Refer to the example in relation to discussions about BDBN.

Generally, the death of a member requires a change to the trustee. A SMSF has a 6-month window to change the trustee if required.

Be mindful that a member’s enduring power of attorney will end on their death.  A legal personal representative can step into the trustee shoes on behalf of the member who passed away but only until the member death benefits commence to be paid. This is not automatic, and the usual request, election and acceptance must be prepared.

Death Benefit Nominations in a SMSF – Key Takeaways

  • Superannuation death benefits do not automatically form part of the member’s estate
  • The trust deed must include a clause allowing the member to direct the trustee to make a BDBN or a DBA or elect a reversionary pension beneficiary
  • Death benefit nominations should be part of overall estate planning
  • Review your SMSF trust deed and update if required
  • Ensure trustee decisions are not disproportionately made by members with minor balances
  • Check your pension documentation for reversionary pension beneficiaries
  • Decide who you want to receive your superannuation member balance
  • Review and update any existing death benefit nominations already made
  • Consider if the trustee can or should be transferred to a sole member sole trustee fund or if a new trustee should be appointed

Do you need help with your SMSF Death Benefit Nominations?

Give us a call on 1300 392 544 or get in touch online.

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If you’re interested in learning more about SMSF Death Benefit Nominations? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

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Do you need help with your SMSF Death Benefit Nominations?

Give us a call on 1300 392 544 or fill in the form above

Contact Us

If you’re interested in learning more about SMSF Death Benefit Nominations? Please reach out for a confidential quote. Simply submit your details and one of our friendly team will be in touch as soon as possible.

Contact Us