Unless the super fund entitlements arising on your death (Death Benefits) are properly dealt with, your Will cannot direct to whom these benefits will pass.
There are four key steps to ensuring that your superannuation entitlements will be passed to your preferred beneficiary:
Step 1: having a Binding Death Benefit Nomination in place;
Step 2: having it completed and witnessed properly;
Step 3:reviewing it annually, particularly should relationships change (such as in the event of a divorce or the death of a beneficiary);
Step 4: ensuring that your Binding Death Benefit Nomination complies with the Superannuation Industry Supervision (SIS) Act regulations.
A super fund deed generally gives the trustee a broad discretion as to how a member’s entitlements can be dealt with in the event of that member’s death. However, the trustee’s view as to who should receive your membership Death Benefits, and in what proportions, may not reflect what you would have wished. Under most super fund deeds, a member can direct the trustee as to how Death Benefits are to be paid. Signing a Binding Death Benefit Nomination (BDBN) accomplishes this.
It is important to note that the requirements for creating a valid BDBN can vary, but primarily depend upon whether your super fund is a multi-member fund (Public Offer Fund) or a self managed superannuation fund with four or fewer members (SMSF).
Public Offer Funds
If the super fund deed permits BDBNs, there are statutory requirements that must be met before the document is valid. These are set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act) and its regulations.
In particular, the regulations provide that the only persons who can be nominated as beneficiaries under a BDBN are:
- Dependants of the member; and
- the legal personal representative of the member (i.e. the executor of a deceased member’s estate).
The regulations also provide that:
- a BDBN must be signed by the member in the presence of two adults who must sign and date the form; and
- a beneficiary under the BDBN cannot be a witness.
Another important feature of the SIS Act regulations is that BDBNs lapse after three years. It is therefore essential for members of Public Offer Funds to renew their BDBNs every three years in order for them to remain effective.
BDBNs for Industry Funds therefore have the advantage of being more likely to address a member’s changing personal circumstances. However, they have the disadvantage of ceasing to be of any use if three years pass by without renewal. We recommend that our clients review their BDBNs annually.
Self Managed Super Funds (SMSFs)
The ATO confirmed that SIS Act s 59 and SIS Reg 6.17A do not apply to SMSFs. This means that, when it comes to SMSFs, Binding Death Beneficiary Nomination issues are a matter solely for the particular SMSF deed and have nothing to do with the SIS Act regulations. Therefore, whether a BDBN is available at all and, if so, the requirements for them, depends on the terms of the particular fund’s deed. It is generally possible for a BDBN made by a member of a SMSF to be made for a period in excess of three years. Therefore, BDBNs for SMSFs have the advantage of not having to be reviewed every three years to avoid becoming invalid. But the downside is that they may not keep up with changing personal circumstances.
What can go wrong?
Many BDBNs have successfully directed death benefits of deceased members to those nominated to receive benefits. However, not all have gone according to plan, as a growing list of legal cases indicates.
Examples of poor completion include:
- Percentage allocations of benefits exceed 100%;
- nominated beneficiary is not a SIS dependant;
- and witnesses are listed as beneficiaries.
With the increase in superannuation balances, together with many blended family scenarios, ensuring that BDBNs have been properly executed should be an important consideration in your estate planning.
For more information or advice call us on (02) 8268 2900 for an obligation-free chat.