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Self Managed Super Fund (SMSF) Article
Nominating Beneficiaries for Death Benefits
By Tony Negline.
This article may be out of date.
23rd June 2004
Estate planning has always been an essential part of superannuation.
We know this because for many years super funds have had to exist to pay retirement benefits to members and to pay death benefits to a member’s dependants or estate.
Because super funds are trusts, it is the trust deed, trust law and the super laws which drive who is a dependant and how the death benefits can be paid to them.
Currently the super laws define a dependant to include a member’s spouse (including a defacto) and any child. The government has recently announced that it intends to expand this definition to any adult family members who reside together and offer each other mutual support which is defined as "continuing mutual commitment to financial and emotional support between two people". We are yet to see legislation implementing this amendment.
Some super fund trust deeds limit the definition even further than what is already allowed by the super laws. For example perhaps only legally married spouses are dependants. Maybe only minor children (that is, under 18) are dependants.
Self Managed Super Fund members should check their fund’s trust deed to see what would happen to their benefits if they were to die. What do they need to do to ensure their wishes are not thwarted by the surviving members?
SMSF trustees should check their fund’s trust deed to see what is expected of them if a member were to die. To whom would benefits be paid? How would those benefits be paid? What are the chances that the trustees decisions might be challenged by an aggrieved beneficiary? What can trustees do to limit the possibility of costly and timely challenges?
Traditionally trust deeds have given trustees total discretion as to whom a death benefit will be paid. This is designed to allow for complete flexibility. But with flexibility comes potential danger.
For example, the Smith Family Super Fund has four members, Bill and Mary Smith and their two early 20s children, Bruce and Catherine. Bill’s account balance is $500,000. Total assets in the fund are $600,000. The SMSF owns a life insurance policy on Bill’s life of $500,000.
Nothing has been formally agreed between all the trustees however Bill and Mary have had a private conversation about what should happen if Bill dies. Mary will receive a lump sum of $500,000 which will clear all personal debt. The remaining funds will be used to pay her a pension.
How death benefits should be paid can have very interesting taxation implications, but this is a large subject and we will cover another day. For the time being assume that half lump sum and half pension is a good way for Mary to receive Bill’s death benefits.
Now lets assume that Bill has just died. Who decides how his benefit should be paid? All SMSF members must be trustees and often all trustees will have equal voting rights. It is therefore possible for Bruce and Catherine to gang up on Mary and decide that Bill’s death benefit should be paid differently to Bill and Mary’s private agreement.
In the majority of situations this example would be settled exactly in accordance with Bill and Mary’s private conversation. Bruce and Catherine and many like them wouldn’t even think about trying to get some of their parent’s money for themselves.
Unfortunately a person’s behaviour can become unpredictable when an unexpected windfall is within easy grasp.
So how do Bill and Mary ensure that upon Bill’s death there are no nasty surprises? It is also a good idea to work out what would happen if Bill and Mary died together?
For SMSFs the super laws provide two possibilities. Not all trust deeds cater for these two possibilities trustees should think carefully before enacting either possibility. Before a binding nomination is completed a careful review of a person’s Will should take place.
The first binding death benefit nomination can be done by any super fund. This nomination for some requirements operates like a Will. It must be signed in from of two adult witnesses who are not nominated as death benefit beneficiaries.
In other requirements, it has its own rules. These nominations may only last for up to three years unless a member specifically declares otherwise. A member may only nominate a dependant, that is, a spouse or any child or their deceased estate.
The second type of binding death benefit nomination is unique to SMSFs. Under the super laws, SMSF trustees may take a direction from a member on how a fund is run. Under this rule a member would direct a trustee that in the event they died, the death benefit has to be paid to certain people (dependants or estate). If drafted correctly these nominations do not expire after three years.
Preparing this document can sometimes be tricky and often this type of binding nomination is drafted like a Will.
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.