When you pass away, your superannuation benefits do not automatically form part of your estate. Instead, they're paid out by the trustee of your superannuation fund. So, what can you do to ensure your super is paid out in accordance with your wishes? For many people, a binding death benefit nomination (BDBN) is an appropriate safeguard to put in place.
How does a BDBN work?
If you don't make any nomination during your lifetime about how your super benefits should be paid on your death, the trustee has discretion to decide who will receive your benefits and in what form. Under superannuation law, your death benefits can be paid to either, or a combination, of:
- your "legal personal representative" (LPR) – effectively, the executors of your estate (which means those superannuation benefits will then be dealt with by your will); and/or
- one or more of your "dependants" directly, which include your spouse, children (of any age) and anyone with whom you were in an "interdependency relationship".
Where the trustee decides to pay some benefits directly to a dependant, the trustee can also decide whether to pay your benefits as a lump sum or pension. The trustee has a lot of discretion! If you'd prefer to have certainty about how your benefits will be paid, consider making a BDBN.
This is a written direction given to the trustee specifying where your death benefits should be paid. Provided the BDBN is valid and still in effect when you die, the trustee is bound to follow it.
Making a valid BDBN
You should seek expert assistance when preparing a BDBN, especially if you're an SMSF member. Here we outline a few key principles to keep in mind.
First, the trustee can't follow a BDBN to the extent the payments would breach superannuation law. This means your BDBN can only specify the permitted recipients discussed above.
Second, for non-SMSFs, a BDBN must meet various requirements to be valid, such as being witnessed by two adult witnesses. For SMSFs, these requirements vary according to their deed.
Third, the BDBN must work in harmony with other relevant legal documentation. This includes:
- The fund's deed (as mentioned above): the terms of SMSF deeds vary greatly. SMSF members must ensure their BDBN is permitted and valid under their fund's deed.
- Pension documentation: if you're receiving a pension just before your death, any terms of the pension documentation that contradict your BDBN may cause legal uncertainty.
- Your will: if your BDBN directs your benefits to your estate, your will can be tailored to ensure the benefits pass to specific beneficiaries in the most tax-effective manner.
For non-SMSFs, a BDBN expires after three years. In an SMSF, a BDBN can potentially last indefinitely, but many SMSF deeds impose a three-year expiry anyway! In any event, it's good practice to review your BDBN every few years or whenever a major life change occurs.
Need to make a BDBN?
Contact your superannuation fund or financial planner or lawyer to make your binding death benefit nomination to ensure your wealth passes into the right hands, giving you maximum control and peace of mind.
© Copyright 2019. All rights reserved. Source: Thomson Reuters. IMPORTANT: This communication is factual only and does not constitute financial advice. Please consult a licensed financial planner for advice tailored to your financial circumstances. Brought to you by Robert Goodman Accountants.