If you are making a binding death benefit nomination, you will need to decide how it should be structured. Attwood Marshall Lawyers Wills & Estates Senior Associate, Xara Coassin, explains the advantages and disadvantages of directing your superannuation to your estate compared with a specific beneficiary, and the added risks for self-managed super funds.
Whether or not you should pay your superannuation directly to a beneficiary (i.e. outside of the estate) or via your Will (i.e. via the Legal Personal Representative) depends on several factors, and the answer can even be different depending on which state you live in.
For example, if there is a real risk of a family provision claim being brought against your estate then you may wish to keep your superannuation proceeds from entering your estate and therefore being open to the courts to deal with.
However, if you live in New South Wales, then notional estate applies and your super can be clawed back into the estate, where there are not enough funds to pay out a successful applicant from the estate.
Our companion article explains why having a valid a binding death benefit nomination is so important.
Under superannuation legislation, your superannuation proceeds can only be given to certain beneficiaries, namely, a spouse, child, dependent, or LPR.
If you nominate a beneficiary that is outside of this list, then your binding nomination will fail, and the superfund will retain its discretion on who to give your superannuation to.
Estate versus direct beneficiary: weighing it up
| Paid to your estate (via your legal personal representative) | Paid directly to a specific beneficiary |
Who can receive it | Once in the estate, your super proceeds form part of your assets able to be gifted in your Will. If you do not specify who you want your super to go to, then it will form part of the residue of your estate. Therefore, the benefit can ultimately go to anyone named in the Will, including a non-dependant such as a parent or friend. | Limited to dependants within the meaning of the Superannuation Industry (Supervision) Act 1993 (a spouse, child, or person in an interdependency relationship with the deceased). A nomination naming someone outside this class is invalid. |
Succession planning | If your super proceeds are directed to your Will and a beneficiary dies, then your Will can provide a contingency, for example, to the children of a deceased child. | If your super proceeds are paid directly to your beneficiary and they die, then that percentage will fail and the trustee retains its discretion on who to give that percentage to. Note that grandchildren (unless they are dependants) cannot receive super proceeds directly and even if this is your intention, they will miss out. |
Speed and cost | Requires a grant of probate or letters of administration before funds can be distributed, adding time and cost, particularly where the estate has few other assets. | No grant of probate is required, so funds can generally be accessed more quickly and at lower cost. |
Flexibility | Your Will can, include various directions to your executor as to how you wish for your super proceeds to be dealt with, for example if you wish for it to be protected in a trust or if you have tax-dependant beneficiaries, your Will can include a power which allows your executor to apportion super proceeds to tax dependants, reducing the overall tax paid. | A validly executed binding nomination removes the trustee’s discretion entirely; the trustee must pay in accordance with the nomination. If circumstances later change (for example, divorce or separation) and the nomination isn’t updated, the courts have no jurisdiction to alter a validly executed BDBN. |
Court’s power to intervene | The court has jurisdiction to adjust a distribution, including through a family provision claim. | For self-managed super funds, courts generally won’t override a trustee’s decision made within the terms of the trust deed simply because the outcome seems unfair, provided the trustee gave genuine consideration to the decision and acted within its powers. Retail and industry funds work differently: a dispute goes to AFCA first, which can vary or set aside a trustee’s decision it considers unfair or unreasonable. An AFCA superannuation decision can then be appealed to the Federal Court, but only on a question of law, not the facts. |
Exposure to claims after the benefit is received | Once paid into the estate, the benefit is exposed to family provision claims, court orders and associated costs, and to creditors if the estate is insolvent or subject to litigation if the Will has inadvertently allowed superannuation to be used for debts. Otherwise, superannuation and life insurance proceeds are considered exempt assets for creditors. Careful drafting is required to ensure this does not occur. | In NSW, notional estate applies, and super proceeds can still be used to satisfy a family provision claim. This is not the case for other states. While the benefit bypasses the estate, it isn’t protected by a Will or trust. Therefore, If the beneficiary is later bankrupt, sued, or part way through a family law property settlement, the funds can be taken from them directly. |
The added risk for self-managed super funds
The same principle applies for self-managed super funds (SMSFs) where there is no valid binding death benefit nomination, i.e. the trustee retains its discretion on how to distribute super proceeds.
However, the added risk here is that it is likely that a family member can become the remaining trustee who makes that decision. This is particularly risky where blended families are involved, however it is not only limited to these situations.
If the wrong person gets control of a self-managed super fund, and they are a class of beneficiary that can legally receive death benefits from a member, provided they act within the terms of the trust deed, they can essentially decide to pay 100% of the super proceeds to themselves.
This is exactly what happened in the following case.
In Katz v Grossman [2005] NSWSC 934, a father’s SMSF held a non-binding nomination leaving his superannuation equally between his two adult children. After his death, one sibling, already a trustee of the fund, appointed her husband as the second trustee before probate had been granted, and the two of them (using their discretion as trustees) then paid the entire death benefit to her.
Even though the trustees’ decision contradicted the father’s stated wishes in both his Will and his non-binding nomination, the court found the appointment (of the husband as trustee) was valid under the terms of the trust deed, even though it excluded the other sibling and the decision of the trustees was upheld.
This case is a clear illustration of what happens without a valid binding nomination. Control of the trustee after death decides the outcome, not the Will, and not a non-binding form.
It is therefore very important to consider the estate as a whole, and the circumstances of your intended beneficiaries, when deciding how your superannuation should be structured.
Binding death benefit nominations can be an important tool when completing your estate plan, but if these documents are not prepared and signed correctly, or structured without regard to your wider estate, there may be serious consequences that could 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.
Attwood Marshall Lawyers – helping you plan for the future and preserve your wishes
Attwood Marshall Lawyers has 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 strategy for your superannuation and your Will.
To set up an appointment 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 using our online booking app.
