A Binding Death Benefit Nomination is a relatively new tool used in the context of succession planning. Wills and Estates Partner, Angela Harry, explains how superannuation benefits are dealt with upon death and how people can ensure their superannuation ends up with their intended beneficiaries.
How are self-managed superannuation funds dealt with upon death?
A significant proportion of the wealth of people today is held in the superannuation environment. It’s not uncommon for superannuation to be an individual’s most valuable asset.
Not only is the value of wealth in superannuation continuing to grow, but so is the number of self-managed superannuation funds.
The purpose of self-managed superannuation funds is to build up wealth for retirement. The attitude of many is that they will utilise these benefits for retirement and simply spend all that is in the account when the time comes. The reality is, when people die there is usually substantial value remaining in the fund.
According to ATO statistics over 1.1 million Australians are members of self-managed superannuation funds with those funds holding over $747 billion in assets.
There is a significant lack of planning and understanding by many members in relation to what happens to their superannuation on death. What many people do not realise is that superannuation benefits are not covered by their Will. The payment of these benefits are left to the superannuation trustee’s discretion if there is no Binding Death Benefit Nomination in place (subject to the terms of the fund’s trust deed).
If superannuation nominations are not done properly, the benefits may not end up in the hands of those intended and the costs of having the argument over where those benefits are to be paid can be significant.
What Succession Law issues can arise around self-managed superannuation funds?
Superannuation assets are treated differently upon death compared to the distribution of other assets. Technically, you do not own your superannuation balance until it is paid out to you. In the meantime, it is held by the fund on trust for the member.
When someone dies, what happens to the superannuation funds will be determined by:
- the terms of the trust deed governing the superannuation fund;
- superannuation law; and
- the terms of any binding or non-binding nominations that the member has put in place.
It is important for people to consider giving directions to the superannuation fund’s trustee about how they want their benefits to be paid on death. Nominations need to be done properly for self-managed superannuation funds because if they are not, there’s a risk that any nominations put in place can be set aside.
What happens to member benefits on death?
The member’s superannuation benefits include:
- The contributions; and
- Any insurance held within the fund.
A death benefit nomination is a notice that the member gives to the fund’s trustee regarding the payment of the member’s benefits on death. There are a few different types of death benefit arrangements that can be made. These include:
- Automatic reversionary pension – a pension that is established by the still living fund member. It reverts that member’s benefits to an income stream dependent on death. In most instances it is a pension for the spouse.
- Binding Death Benefit Nomination – the trustee must pay the death benefit as nominated.
- Non-Binding Nomination – the trustee has the discretion to follow the stated wishes of the member or direct the entitlements to another person or the estate.
- Non-lapsing binding nomination – a request by you to the trustee to pay a death benefit to the person/s you nominate which has no expiry date.
- No nomination – if you don’t make a nomination the trustee will pay your benefit to your estate or use its discretion to determine who is eligible to receive it.
Different circumstances may require different types of nominations
Whether a Binding Death Benefit Nomination is appropriate will depend on the circumstances of the member, as well as which type of arrangement may suit their intentions.
This is something that needs to be looked at in the context of a person’s estate planning goals. If you have a member who wants flexibility on how their benefits will be paid and in what form, for example lump sum payment or pension, then it may not be appropriate to do a nomination.
For those who want control and want to ensure the benefits end up with a particular person, or they have concerns that there may be people who will challenge the decision of the trustee, then it may be appropriate for a binding death benefit nomination to be put in place.
Examples of situations where it may be appropriate to make a Binding Death Benefit Nomination:
Example 1: A member has three adult children. One child has a problem with drug addiction, another is going through a marital breakdown, and the third is facing the prospect of bankruptcy. If the superannuation funds were to be paid to the member’s children, there is a risk it may be lost to certain predators or creditors. In this circumstance a member could complete a Binding Death Benefit Nomination to pay their superannuation benefits to their estate upon their death and set up a Testamentary Trust in their Will. This would quarantine and protect the benefits intended to go to those children.
Example 2: The member has remarried. They want to ensure that their new spouse receives their superannuation benefits, rather than children from a previous relationship. By preparing a Binding Death Benefit Nomination this would avoid the benefits going into the estate which could potentially be open to a challenge by the children.
Self-managed superannuation funds with multiple members
A self-managed superannuation fund can have between one and four members. Each of those members must be represented at trustee level. In practice, most funds either have two members, usually a husband and wife or de facto couple, or are a single member fund.
Technically you can have a self-managed superannuation fund with other members, which may include mum, dad and two children, or siblings, with the goal being that the fund continues to operate at a generational level.
There can be problems with the practicality of having a fund with several members. Each member may have different investment goals and operating an inter-generational fund with different goals can be difficult. Payment of superannuation benefits to elderly members can also be problematic if the portfolio is dominated by a single high-value asset, such as real property.
If there is any conflict between the members it can trigger a division of the fund assets or a forced sale. The reality of this type of arrangement is that if there is conflict within the family then the fund may need to be wound up which can have cost implications.
How can Attwood Marshall Lawyers help?
Attwood Marshall Lawyers have one of the largest Wills and Estates team of lawyers in Australia who practice exclusively in this specialised area of law.
Binding Death Benefit Nominations can be an important tool in succession planning, however if these documents are not properly prepared, they can cause serious problems. If practitioners don’t have experience and a comprehensive understanding in this evolving area of law, it can be very messy. The biggest danger is over-simplification of these documents, and not giving them the attention they deserve. Our team can help you understand what documents to put in place and determine if your circumstances require a Binding Death Benefit Nomination in order to protect your assets.