Super and estate planning
Death benefit nominations
The payment of a death benefit is ultimately a matter of trustee discretion, subject to the payment standards and the governing rules of the fund. The trustee's decision must be fair and reasonable.
Non-binding death benefit nomination
Some super funds may permit members to make death benefit nominations which are non-binding. In such cases, members simply provide trustees with guidance regarding their preferred death benefit recipients, with trustees making the eventual decision in the light of all the relevant circumstances.
Binding death benefit nomination
A trustee may provide greater certainty to members in making death benefit nominations by allowing the members to determine, with substantial certainty, the persons to whom death benefits would be paid. Provided the trust deed allows binding death benefit nominations and the regulations are complied with, a member's valid nomination binds the trustee.
Binding death benefit nomination notices must:
- be signed and dated by the member
- be witnessed appropriately by two individuals who are not nominated beneficiaries or the member
- specify the proportion of the benefit to be paid to each nominated beneficiary
- only nominate beneficiaries who are either dependants or the legal personal representative of the deceased member's estate, and
- be sufficiently clear and unambiguous for the trustee to act upon.
Other important issues involved with binding death benefit nominations are:
- the nominated beneficiaries must be either dependants or the LPR at the date of the member's death
- the maximum term that an unchanged notice can remain in effect is three years
- there may be provision for the governing rules of the fund to fix a shorter term, and
- binding death benefit nominations will generally not specify the form of the super death benefit (ie lump sum or pension).
Note: For the purposes of a family provision claim, a distribution made to a beneficiary as a result of a binding or non-binding death benefit nomination may not prevent the Court from making a determination that a member's super death benefit should form part of the member's notional estate. This does not impact a trustee's ability to make a payment in accordance with a member's valid binding nomination; however, this may have implications for the recipients of those benefits. Members should seek their own legal advice before making a will.
Non-lapsing death benefit nomination
As an alternative to a binding death nomination, some funds now provide members with the ability to make a non-lapsing death benefit nomination.
A valid non-lapsing death benefit nomination notice will bind the trustee (in the same way as a binding death benefit nomination). To be valid, the trustee must consent to the nomination, all beneficiaries nominated must be SIS dependants (or the member's legal personal representative) and any additional conditions specified in the trust deed must also be complied with.
Importantly, a non-lapsing death benefit nomination is not automatically subject to the ranges of specific superannuation law requirements that apply to binding death benefit nominations. Therefore, requirements including a three-year maximum term and witness signatures on the nomination may not apply.
It is important to note, however, that the governing rules of many funds will include certain requirements when making non-lapsing death benefit nominations (for example, a fund could require the signatures of a certain number of witnesses).
What happens where part of a nomination is not valid?
Where part of a binding death benefit nomination or non-lapsing death benefit nomination is not valid (eg 50% nomination to spouse and 50% nomination to non-financially dependent sibling), the super fund's governing rules and procedures will determine the required course of action by the trustee. This will vary from fund to fund and could include:
- the entire nomination being invalidated and either trustee discretion or the fund's default provisions applying to the whole death benefit.
- the trustee remaining bound to pay the valid part of the nomination, with the remainder of the death benefit then subject to either trustee discretion or the fund's default provisions.
ASIC warning to advisers on binding death benefit nominations
In January 2018, ASIC put the financial advice sector on notice about meeting requirements for witnessing signatures, after finding issues with advisers failing to correctly witness binding death nomination forms for superannuation benefits.
ASIC became aware of a widespread practice among financial advisers of witnessing or having staff members witness client signatures on binding death nomination forms without being in the presence of the signatory. In other cases, forms were backdated. Each of these practices fails to comply with the law and may lead to the nominations being invalid.
See ASIC Media Release 18-015MR for more information.
SMSFs and death benefit nominations
The above discussion on binding death nominations and non-lapsing death benefit nominations does not generally apply to SMSFs. The legislation relating to binding death nominations specifically excludes SMSFs, therefore neither these provisions nor those relating to non-lapsing death benefit nominations apply to SMSFs.
It is therefore open to an SMSF to accept from a member a binding nomination that, for example, does not lapse or is not required to be witnessed. However, such a nomination must still nominate only the dependants or legal personal representative of the member and should specify the proportion of the benefit each is to receive and be in writing. This principle has been confirmed by the ATO in SMSF Determination SMSFD 2008/3.
Furthermore, the governing rules of the fund must make specific provision for a member of the SMSF to make a binding death benefit nomination. Regard should be given to whether the rules should also make provision for administrative or procedural matters in relation to the binding nominations. For example, the rules may require the nomination to be made in a specific form or may in fact set a time limit on the validity of the binding nominations. It is also important to note that some SMSF trust deeds may directly or indirectly reference the legislation that relates to binding death nominations, in which case the requirements would apply to that fund.
Last modified: Wednesday, July 24, 2019