How do you make sure your superannuation goes to your intended beneficiaries after you die?

Most people don’t realise their superannuation won’t always end up with who they have left their assets to in their Will. Attwood Marshall Lawyers Wills & Estates Lawyer, Xara Coassin, explains the pros and cons of executing a Binding Death Benefit Nomination with your superannuation fund when completing your estate plan and your Will.

What is a Binding Death Benefit Nomination (“BDBN”)?

A written direction from a member to their superannuation trustee (usually a prescribed form) setting out how they wish some or all of their superannuation death benefits to be distributed on their death. (reg 6.17A)

The nomination is generally valid for a maximum of three years, or shorter depending on the governing rules of the fund (Reg 6.17AA(7)) and lapses if it is not renewed.  If the nomination is valid at the time of the member’s death, the trustee is bound by law to follow it.

Self-Managed Superfunds (“SMSFs”) may allow a non-lapsing BDBN – a review of the SMSF trust deed is always required when putting in place a valid BDBN.  Some SMSF trust deeds (especially older ones) do not permit a BDBN and require updating before one can be put in place.

With most people holding a substantial amount of wealth in their superannuation fund, it is important to understand how to handle this asset in the context of your estate planning and making of your Will.

Superannuation benefits do not automatically form part of a deceased person’s estate

In order to control who you would like to benefit from your superannuation assets, you can complete a form (called a Binding Death Benefit Nomination) that nominates a person or persons to receive the Super benefits upon your death.

The question is often asked “why should I have a Binding Death Benefit Nomination (“BDBN”) in place with my superfund, or self-managed superannuation fund, and who should I nominate?”

To help answer these questions, the below points highlight some of the advantages and disadvantages of paying superannuation to a deceased person’s legal personal representative (“LPR”) or executors resulting in those death benefits forming part of the estate assets.

We have also discussed the pros and cons of signing a Binding Death Benefit Nomination in favour of a specific beneficiary, particularly an adult child who is not financially dependant upon the deceased.

Advantages of putting a Binding Death Benefit Nomination to the estate or LPR in place

1. Death benefits can generally only be paid to a deceased member’s legal personal representative (“LPR”) (i.e. to become part of the estate) or to dependants within the meaning of the Superfund Industry (Supervision) Act 1993 (SIS Act). The SIS Act defines a dependant as either a spouse, child, or any person with whom the deceased had an interdependency relationship with. The Superfund Industry (Supervision) Regulation 1994 (reg 6.22(3)) only allows payments to be made to another person when a trustee of a super fund, after making reasonable enquiries, has not found a LPR or dependant of the deceased. By paying death benefits to the LPR, and therefore into the deceased’s estate, death benefits can be paid to non-SIS dependants, such as a parent or a friend of the deceased
2. For a comprehensive estate planning strategy, the testator can include a clause in their Will directing how their superannuation death benefits are to be paid. For example, where possible to tax dependants.
3. The executor of the Will has discretion as to how to best distribute the estate assets in accordance with the Will (i.e., if the Will does not specify how death benefits are to be dealt with then the executor may choose to distribute the death benefit portion of the estate to tax dependant beneficiaries, attracting a tax benefit and subsequently increasing the quantum of the estate (as less tax is paid).
4. When death benefits are coming from a self-managed superannuation fund (“SMSF”), if the controlling positions of the SMSF are not properly thought out and the wrong person gains control, the remaining trustees can potentially pay the whole amount to themselves (if there is no Binding Death Benefit Nomination and subject to the terms of the trust deed). For example, such an outcome could potentially result in exclusion of siblings as was the case in Katz v Grossman [2005] NSWSC 934 which involved a dispute between siblings over the control of their father’s superannuation trust fund and whether the appointment of the sister as trustee (by her father) and later appointment of the sister’s husband as an additional trustee of the fund, was valid.

   Despite noting that the “strategic and relatively speedy appointment [of her husband] raises questions,” the Court allowed the appointment.  The Court considered the terms of the deed, which intended a replacement trustee within 90 days, together with the substantial delay in obtaining probate. The Court stated that (the sister) “cannot be criticised for carrying out the terms of the trust deed.”  Interestingly, had probate been granted earlier, a new trustee would have been appointed by the estate’s executors, i.e., both siblings.  The Court did consider this and noted that the estate appeared to have been “either immobilized or deadlocked” because it was unlikely that the siblings would have agreed on a new appointment.

   This highlights the practical implication of failing to consider how control of a SMSF passes in the event of the death of a member and the importance of considering the relationship between a Binding Death Benefit Nomination and the deceased’s Will.  The result was clearly contrary to the intention of the sibling’s father, evidenced in the Will and non-binding death benefit nomination (which intended that the funds be shared equally between the siblings).

   Notably, the sister refused to confirm whether or not she would uphold her father’s wishes; a practical reminder that a Will cannot be relied upon to determine the controllers of a trust and unless a valid Binding Death Benefit Nomination exists, the trustee remains free to exercise its discretion.

5. The courts do not have jurisdiction to amend an unfair payment in a SMSF if it is within the terms of the trust, whereas if it is paid to the estate, the court has jurisdiction to amend.
6. The upshot of this case is that you should always consider making a binding nomination to your intended beneficiaries, and if not a specific bequest, directing that it be left to your executors to deal with on behalf of your estate as per your wishes in your Will.

Disadvantages of putting a Binding Death Benefit Nomination to the estate or LPR in place

1. By paying your death benefits to your LPR, death benefits become part of the deceased’s estate assets and therefore are susceptible to family provision claims (including court orders) and associated costs as well as if the estate is insolvent or subject to litigation. The benefit might be lost to creditors or litigation costs.
2. The Will may not reflect the wishes of the deceased in regard to superannuation payments, for example, if the Will has not been updated or there has been a change in circumstances. In this case, the trustee of the super fund will pay a death benefit at their discretion in accordance with the governing rules of the fund and relevant law.
3. It can take longer for a beneficiary to receive the payment than if there was a Binding Death Benefit Nomination in place nominating a dependant. This is especially the case if a family provision claim is made against the estate.
4. If there are no other assets in the estate, and if the beneficiaries under the Will are SIS dependants, they will be disadvantaged by the costs and delay involved in obtaining probate or letters of administration. Whereas, if the payment was made directly to them from the superannuation fund, there would be no need to obtain a grant or probate.
5. There is no certainty (compared to a valid Binding Death Benefit Nomination) as to who will receive death benefits if the Will does not specify who is to receive the death benefit. It will be up to the executor’s discretion in accordance with the terms of the Will.

Advantages of putting a Binding Death Benefit Nomination in place to a specific beneficiary

(i.e. a spouse, child, or any person with whom the deceased had an interdependency relationship with)

1. If there are little assets in the Estate a BDBN would eliminate the need to obtain a grant or probate and save legal costs.
2. If the BDBN is valid, you retain control as to who will receive the Death Benefits – the Trustee must pay the death benefits in accordance with the BDBN.
3. The Trustee cannot exercise its discretion as to who will receive the Death Benefits.
4. Certain classes of SIS dependants, for example your spouse and children under 18 in an interdependency relationship or a dependant, can receive the Death Benefits tax free. S302-195 ITAA 1997 

Disadvantages of putting a Binding Death Benefit Nomination in place to a specific beneficiary

1. If you do not update your BDBN and your circumstances change, for example if you nominate a spouse and you divorce or break up, the courts do not have jurisdiction to change a validly executed BDBN.
2. The specific beneficiary is not protected by the Will or a trust. If they are bankrupt or being sued or are in the middle of a separation in the family Court, the funds left to them can be taken away from them by creditors or a Court.
3. If a non SIS-dependant is nominated, the nomination will fail – it is invalid.
4. Adult children (non dependant) who are nominated will be taxed between 16-32% of the funds, depending on the tax status of the contributions–

It is therefore very important to consider the estate as a whole and the circumstances of your intended beneficiaries when making a succession plan.

Attwood Marshall Lawyers – helping you plan for the future and preserve your wishes

Attwood Marshall Lawyers have one of the largest and most experienced Wills and Estates teams in Australia. Our estate planning lawyers practice exclusively in this specialised area of law and have the experience to put in place the most appropriate strategies when succession planning. We want to help you plan for the future, protect your assets and your family, and preserve your wishes. 

Binding Death Benefit Nominations can be used as an important tool when completing your estate plan and crafting your Will. However, if these documents are not prepared and signed correctly, there may be serious consequences which could potentially cost your loved ones tens or hundreds of thousands of dollars in legal costs and tax. It is important to discuss your intentions with an experienced estate planning lawyer who has a comprehensive understanding of succession planning and superannuation.

Our team can help you understand what documents may be beneficial to put in place and help you determine if your circumstances require a Binding Death Benefit Nomination in order to protect your assets and fulfil your testamentary intentions.

To discuss your estate planning needs, contact our Wills and Estates Department Manager, Donna Tolley, any time on direct line 07 5506 8241, email dtolley@attwoodmarshall.com.au or call 1800 621 071 any time. You can also make an appointment online now by booking using our online booking app.

Read more:

Understanding assets that you cannot leave to your beneficiaries in your Will: How to ensure your assets go to who you want them to!

Don’t get complacent about your Will – now’s the time to get it done!

How do I bequeath wealth from my Self Managed Super Fund? (Blog & Podcast)