Binding Death Benefit Nominations
by Stephen Lynch, Somerville Legal
Just as it is desirable to maximise your wealth during your lifetime, it is important to ensure that in the event of your death your assets pass to the people you wish to benefit. For most people, superannuation is one of the most significant assets they have, and ensuring that it is paid to the appropriate people is a critical element of estate planning.
One of the most common mistakes people make is thinking that their superannuation is automatically an estate asset, and therefore covered by their will. In fact, superannuation is a separate type of asset that is held by the superannuation fund and paid out by the trustee of the fund upon the death of the member of the fund.
In fact, in most cases, it is the trustee, and not the member, which decides who gets the member’s superannuation death benefits, and in what proportions.
For most people, the only way to ensure they, and not the trustee, control whom their superannuation death benefits pass to upon death, is to make a binding death benefit nomination (“BDBN”), which is a specific form which directs the trustee how to pay the member’s superannuation upon death.
The advantages of having a BDBN in place include the following:-
Just as having a will is important to ensure that your assets are distributed according to your wishes, most people would rather decide who should get their superannuation if they should die. Most super funds’ rules state that unless there is a BDBN in place, the trustee has complete discretion as to whom to pay the person’s superannuation, as long as the recipient is a dependant of the deceased member(such as a spouse, or child including adult child, of the member) or the member’s Legal Personal Representative (ie their estate).If you want to make the decision as to payment of your super, rather than leaving it to the trustee to decide, a BDBN is critical.
For many people, it is not just that they don’t want the trustee of the super fund to decide who gets the person’s superannuation – it is that they have specific intentions about how all of their estate is to be distributed. For example, they may want a spouse to get the super, but the children to get the non-super assets. A BDBN allows the peace of mind that your wishes will be followed in relation to your super. This allows you to make other decisions, such as gifts during your lifetime that will even up the ledger.
According to the Commonwealth superannuation laws, superannuation death benefits can only be paid to a person’s dependants (such as spouse or children), or estate. If you want your super to pass to someone else, such as your parents, a sibling or a charity, you will need to have a BDBN directing the trustee to pay your super to your estate. Your will can then stipulate that the proceeds are to pass to the intended beneficiary.Or, if you want your superannuation to be held for the benefit of your children, but do not want them to have control until a later age – say, 27 – having a BDBN in favour of your estate and a will that establishes testamentary trusts for your children may be the answer.Without a BDBN, your will may contain very specific provisions as to how your superannuation is to be distributed, only for the trustee to bypass your estate altogether in which case the terms of your will would not apply.
- Speed of payment
When a person dies, the executor of their will would in most cases need to obtain a grant of probate of the estate from the Supreme Court. Although probate is usually a relatively simple process, there can sometimes be delays in obtaining probate, for example due to a dispute over the terms of the will, or delays in obtaining the details about each asset that need to be disclosed to the Court. If there is a BDBN in place that directs the trustee to pay the superannuation to one or more dependants (ie not to the estate), the trustee may be willing to pay out the superannuation before probate is granted.Without a BDBN, even if the trustee was inclined to pay the superannuation to the deceased member’s dependants, the trustee may await probate so as to obtain the executor’s consent to the trustee bypassing the estate.Similarly, if there were no BDBN there may be competing claims from dependants (eg the deceased’s spouse vs his or her children from an earlier marriage). Before making a determination, the trustee would in all likelihood need each claimant to provide a substantial amount of information and would take some time to go over that information before making its decision. Such delays may be avoided if a BDBN is in place.
- Self managed super funds and BDBNs
If a person has a self managed super fund (“SMSF”), there are several factors which will influence who would control that SMSF upon the person’s death. Without a BDBN, whomever controls the SMSF may have the same discretion to decide how the super will be paid. If that person is a dependant, they could exercise that discretion in favour of themselves to the exclusion of their other family members, regardless of the wishes of the deceased. There have been several instances where this has occurred, with devastating results for family relationships.Of course, a BDBN may not be the best way forward in your particular circumstances. There are some circumstances where flexibility is more important than control. In all cases, the decision as to whether or not a BDBN is appropriate for you should be made only after seeking the advice of your financial adviser and estate planning solicitor.
Beware the non-binding death benefit nomination
Many people believe they have a binding death benefit nomination in place, when in fact their nomination is a non-binding nomination. A non-binding nomination indicates your preference to the trustee, but the trustee is not bound to follow it.
If your nomination as to whom is to receive your superannuation death benefits was made by simply ‘ticking a box’ when you fill out your application for membership of the super fund, and was not done by way of a separate form with adult witnesses, then in all likelihood your death benefit nomination is non-binding rather than a BDBN.
There have been many cases where the trustee has acted contrary to the wishes set out in the deceased member’s non-binding nomination. Accordingly, non-binding nominations should be treated with extreme caution, and advice sought from your financial adviser and estate planning solicitor.
Beware the lapsing period of BDBNS
Many BDBNs will lapse after three years, after which they cease to be binding on the trustee. Others are called non-lapsing nominations and will remain in place until revoked. Be careful to ensure you know whether or not your BDBN needs to be renewed every three years.
At the end of the day, superannuation represents a significant part of most people’s wealth, and careful consideration needs to be given as to whom their superannuation may be paid to in the event of their death and whether they have any specific wishes as to how it is to be paid. A BDBN is a critical tool for many people in ensuring their superannuation is properly dealt with upon their death, and should be carefully considered after obtaining specialist advice.
If you need assistance please get in touch with one of our advisors on 02 9415 1511 or email [email protected].