SMSF estate planning: Death benefit nominations
Establishing an SMSF is a clear sign that you know the importance of planning for the future. But one other important consideration is to make sure you also plan for “after” the future – that is, for the time beyond your own lifetime.
With so much money tied up in superannuation, and more and more of it sheltering behind an SMSF trust deed, it is important to make sure any fund balance left over goes to the intended beneficiaries.
One misconception that many people have is that their normal “last will and testament” will safely distribute their estate, including money tied up in their superannuation fund. But the payment of benefits from an SMSF upon the death of a member is done so in accordance with superannuation law and the governing rules of the fund, not according to the terms of a will.
This is why it is important for every member of an SMSF to direct how benefits are to be paid upon their death – and the death benefit nomination is the vehicle to make sure this is done.
A death benefit nomination is a written direction to the SMSF trustee that instructs the trustee to pay a member’s entitlements to certain dependants and/or legal personal representatives (their estate) in the proportions the member wishes in the event of their death.
Binding or non-binding
The nomination can be binding – that is, it leaves no discretion to the trustee about how or to whom benefits are paid – or non-binding. The latter notifies the trustee of the member’s preferred beneficiaries and the division of benefits, but leaves the final decision to the trustee (unless the governing rules of the fund provide otherwise).
A fund without a valid binding nomination will end up having benefits paid out according to the trust deed, if such provisions are included there, or see the trustee being guided, as appropriate, by any non-binding nomination, the late member’s will or just simply exercising their own discretion.
The reasons some SMSF members may opt for a non-binding nomination can include their not having made their mind up about dividing up assets after death, or because they know that superannuation law dictates that benefits can only be directed to dependants or legal personal representatives anyway, or because as fellow SMSF members are family, the member assumes their benefits will end up in appropriate hands.
Also, leaving some discretion to the trustee allows for changed circumstances to be taken into account, particularly where a nomination was made some time ago and relationships or dependencies have changed in the intervening period. The trustee can also consider the tax implications of any particular benefit distribution when the time comes.
A binding death benefit nomination, as noted above, leaves no discretion to the trustee. Benefits must be paid out in strict accordance to the nomination, which can be used to ensure no disputes arise between feuding relatives, or to exclude wayward children or estranged children’s spouses.
Also a binding nomination made for an SMSF does not have to be renewed or reconfirmed every three years (which is a legal requirement for other types of super funds). They are sometimes referred to as “non-lapsing binding nominations”.
Certain advisers promote the view that an SMSF member/trustee should consider refreshing a death benefit nomination every three years anyway, whether it is binding or non-binding – just to be certain and for further peace of mind, but also so that no future beneficiaries will have any reason to dispute or call into question the late member’s intentions.
However making a death benefit nomination binding potentially adds another ongoing requirement for members – to make sure the nomination is updated and continues to reflect their wishes should there be a change in family circumstances. Such changes can include the death of a dependant, the birth of a new dependant or the end of a relationship. Otherwise a binding nomination for an SMSF will remain in force until the member changes or revokes it.
Changing a death benefit nomination can be done at any time by completing a new nomination expressing the changed or new intentions of the member, and giving this to the trustee. The written notice needs to be signed and dated in the presence of two witnesses who are at least age 18, neither of whom is a nominee.