Beneficiary nominations for superannuation death benefits

Where the super fund is an APRA-regulated super fund, members also have the option to nominate a beneficiary. The terms of doing so are often set out in the super fund’s governing rules. The governing rules may allow a range of death benefit nomination options and can include rules about the trustee’s discretion and default payments when making a benefit payment. The options can include:

• Non-binding death benefit nomination or no nomination:
  • Both are subject to ultimate trustee discretion, the former providing guidance as to the member’s wishes.
• Lapsing binding death benefit nominations (BDBNs):
  • If valid, they provide certainty that the trustee will pay the benefit in line with the client’s wishes. They are subject to specific SIS Regulations requirements and lapse after a maximum of three years.
• Non-lapsing BDBNs:
  • They require trustee consent to the nomination and do not automatically lapse. They are also subject to the fund’s governing rules, which in some cases can invalidate the nomination upon the member’s marriage or divorce. As with lapsing BDBNs, for valid non-lapsing BDBNs the trustee is obliged to pay the death benefit to nominated beneficiaries in line with SIS cashing rules.

Rules around the nomination of beneficiaries for SMSFs are different. In particular, non-lapsing BDBNs for SMSFs may not be subject to the same restrictions that apply to APRA-regulated fund, e.g., a SMSF’s governing rules may permit a non-lapsing BDBN that does not have to be witnessed in a particular way or consented to by the trustee.

SMSF rules can also have more flexibility in their nominations and can include specific death benefit payment rules for additional certainty. For example, SMSF rules can set out nomination options that are tailored to provide for specific circumstances or can specify that a particular form of death benefit be paid. These ‘customised nominations’ are also variously known as conditional, contingent, cascading or discretionary BDBNs:

• Conditional and contingent BDBNs:
  • Members can account for simultaneous deaths (couples, children) by having 30-day survivorship clauses and stipulate conditions for potential beneficiaries. They can also ensure a death benefit is paid to a member’s children through a previous relationship by providing a non-commutable income stream to an existing spouse (based on life expectancy) until such time as they die or enter into a new spousal relationship, upon which the benefit (or remainder) is split between the member’s adult children.
• Cascading BDBNs:
  • Similar to conditional BDBNs, they can provide for alternate beneficiaries if one or more beneficiary predeceases the fund member, identify specific assets for beneficiaries and nominate how benefits are to be paid.
• Discretionary BDBNs:
  • May be used for estate equalisation purposes, where, for example, the SMSF trustee has discretion to allocate death benefits based on the receipt of other estate or non-estate assets by certain beneficiaries, such as siblings.

It is important to note that BDBNs can be invalid for a number of reasons. It may be that the BDBN:

• does not nominate an appropriate dependant or the LPR
• does not comply with the requirements of the SMSF trust deed
• has an invalid trust deed due to non-compliance with deed-of-variation formalities
• is worded incorrectly and challenged by a trustee or beneficiary, or
• is signed or witnessed incorrectly according to the trust deed.

Where there is no valid nomination in place or a BDBN is invalid, the default distribution provisions under the fund’s governing rules will apply. Generally, the default provisions normally include two options:

• The trustee will pay the benefit to the deceased member’s LPR, which is then distributed according to a valid Will or intestacy rules, or
• The trustee exercises its discretion to choose eligible beneficiaries to receive the benefit and in what proportion.

If there is a partially invalid BDBN the fund’s governing rules will generally set out how the benefits will be distributed, which could include the fund’s default provisions applying to the entire death benefit, or the default provisions applying only to the invalid nomination.

While beneficiary nominations are an important tool in superannuation estate planning, it is paramount that fund members understand the potential pitfalls. For SMSF members in particular, it is essential to obtain professional legal advice from lawyers with expertise in estate planning, superannuation strategies and tax.