Self Managed Super Funds (SMSF)

Tackling death benefit issues

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth - SuperConcepts Sydney, Australia

Not many of us think about what happens to our superannuation after our death. But typically, it falls to your loved ones to struggle with working out who gets what super you’ve left behind. Those of us in the industry see a conga line of superannuation disputes which get longer and longer on their way to the courts. But what can you do as a trustee or beneficiary of an SMSF to avoid those you care about joining the dance?

To start with, attack is the best form of defence when it comes to replacing a trustee or director of a corporate trustee, validity of binding death benefit nominations and how the fund’s trust deed operates on death of a member. The worst possible outcomes can be avoided if the fund’s documents are up to date and it’s been made clear who will look after payment of your super benefit after you have passed on. In this article we’ll examine issues surrounding the fund’s trust deed, death benefits and replacing a deceased trustee/member.

The fund’s trust deed – is it important?

A fund’s trust deed and governing rules are central to the operation of the fund. Failing to have effective provisions may create unintended outcomes. Also, whether continuity of the trust deed provisions can be proven from the original deed through each amendment and right up to the fund’s current deed is paramount. If there is a break in the chain things could fall apart, an amendment may be questioned and, if challenged, could be invalid.

Consider a provision in the fund’s original deed which left the appointment of a replacement trustee to be decided by the remaining trustees. Let’s suppose a later amended deed provides that on the death of a member a decision concerning a member’s death benefit cannot be made until the legal personal representative of the deceased has been appointed as a trustee or director of the corporate trustee. If the amendment has not been executed correctly and is unable to be linked back to the previous amended deed it may be invalid. If the amendment is contested it may result in another person being appointed and the death benefit possibly going to the wrong person.

We have seen cases in the courts where close relatives, such as sons and daughters, end up as trustees and have appointed their spouse as a trustee or director. The result can be that the death benefit ends up in the hands of an unintended beneficiary to the detriment of the deceased member’s preferred beneficiary.

Binding and non-binding death benefit nominations

It is always possible for you to nominate who you would like to receive your superannuation in the event of your death. This can be done by making a binding death benefit nomination which may be a lapsing or non-lapsing nomination. It is usual that your lapsing nomination ceases after three years at which time you will need to make a new nomination. However, with a non-lapsing nomination it will continue until you decide to amend or revoke it.

The most important thing with your binding death benefit nomination is that you direct the trustee to pay your death benefit to people you have nominated. However, you may nominate that all, or part, of your super be paid to your estate. If you wish to nominate your estate, it is necessary to nominate your legal personal representative who is usually the executor of your estate. They are required to administer your personal assets, including any super that is paid to your estate. This will allow your super to be paid as you have directed in your last will and testament.

If you have a binding death benefit nomination your super will be paid on your death to anyone who is your dependant for superannuation purposes. This may include your surviving spouse and children, anyone who was dependent on you for support at the time of your death and anyone with whom you were in an interdependent relationship. It is possible that someone who is currently your dependant for super purposes now may not be at the time of your death. However, don’t let that put you off nominating someone you would like to receive your death benefit. If that person is not your super dependant on your death, then the person you have nominated would not be entitled to your super.

Any amounts left over after your dependants have received their benefit will depend on the provisions of the fund’s trust deed or what the trustees decide. This may require any amount left over may be paid to your estate via your legal personal representative and distributed according to your last will and testament. If it is up to the trustee of the fund to decide how your super is to be distributed it may be paid to any of your super dependants at the time of your death and/or to your estate.

What’s important when making binding death benefit nominations:

  • Make sure you make a clear direction to the trustee of your SMSF to pay your super benefit to those you nominate;
  • Be clear in who you nominate, what they will receive on your death and how much they will receive;
  • You can nominate whether your death benefit is paid as a lump sum or pension, or combination, and the amount the beneficiary will receive;
  • You can nominate the amount to be paid to each dependant or a proportion of your total death benefit;
  • Make sure that you have signed your binding death benefit nomination and dated it;
  • If your death benefit nomination requires witnesses to your signature make sure they are aged 18 or older, are not nominated as death benefit recipients and that the witness includes the date on which they witnessed you signing the nomination; 
  • Make sure that if your personal situation changes your nomination is reviewed and you make a new binding death benefit nomination that reflects the changes; and
  • Only people who are super dependants at the time of your death and/or your legal personal representative will be entitled to your super benefit.

When it comes to your binding death benefit nomination a witness has the job of witnessing you making your signature - they are not witnessing what is in the nomination. We have come across some nominations where the date of the nomination signed by the member and the date the witnesses signed the nomination were different. In one case, and for some unknown reason, one of the witnesses included their date of birth as the date on which the nomination was signed. In another case the spouse of the member who was to receive payment of the death benefit witnessed the signature. These things may lead to the nomination being treated as invalid and the trustee may be required to fall back on the provisions of the fund’s trust deed. The result may be that someone that you never intended may end up receiving your death benefit.

Reversionary and non-reversionary pensions

If you were drawing a super pension at the time of your death it is possible to provide a reversion to your surviving dependants or it could be non-reversionary. Usually, the reversion is paid to your surviving spouse but can be paid to other dependants.

A reversionary pension means that the pension you were receiving at the time of your death will continue to be paid to your nominated dependant or dependants at the time of your death. It is possible for dependant children under age 18 to receive a reversionary pension. However, if you nominate your adult child as your reversionary pension beneficiary, in most cases, they will be required to convert the pension to a lump sum and withdraw it from your fund. Also, any death benefit paid to your estate must be made as a lump sum because it is not possible to have super pensions paid to your estate.

A reversionary pension will usually take priority over any binding death benefit nominations you make but this may depend on what the fund’s trust deed says. However, you can have a reversionary pension and for your other super benefits you may wish to have a binding death benefit nomination in place. Generally, you will nominate your reversioner at the time the pension commences, however, you can add one or rescind the reversioner after it has commenced.

If you decide that your pension is non-reversionary pension, it will cease on your death and it may be left up to your nominated beneficiary(ies) to decide whether to receive all or part of what is left of your pension as a lump sum or a death benefit pension. Whether you can draw down a death benefit pension may depend on whether it is permitted by your fund’s trust deed, however, it needs to commence as soon as practicable after your death. It is also possible for your dependants to transfer their pension entitlement to another superannuation fund if they wish.

Your dependants need to make sure that the value of the pension they receive as a reversionary beneficiary or commence as a death benefit pension does not exceed their transfer balance cap. If the value of the pensions at the time they commenced plus the value of any death benefit pensions exceed their transfer balance cap, currently $1.6 million, then they may be subject to a penalty for exceeding their cap. So getting some advice in this area may prove beneficial.

Loss of a trustee/member

When it comes to the death of trustee or director of the corporate trustee the loss can mean the appointment of a new trustee or director. They may end up influencing how death benefits may be distributed among dependants or to the deceased member’s estate. So it’s important to see that the fund’s trust deed provides powers to appoint and remove the trustee and amend the trust deed in an appropriate way.

If the fund has individuals as trustees, the superannuation law differs from those funds which have a corporate trustee. This applies especially in single member funds as there must be at least two individual trustees, one of whom is not required to be a member. However, in a corporate trustee it is possible to have just one director who is a fund member, or a second director is appointed who is not required to be a member.

In the case of a corporate trustee the shareholders of the company should be considered. Don’t forget, they should have been given the power to appoint and remove the directors of the company on the understanding that any change will still allow it to comply with the superannuation law. On the death of a fund member who is a shareholder in the corporate trustee a provision should be made in their last will and testament concerning treatment of the trustee company shares. Depending on the circumstances it is possible to cancel the shares that were issued to the deceased and issue new shares to a newly appointed director if appropriate.

Control of the fund is important on the death of a member as the trustees may end up deciding who is to receive part or all of the member’s death benefit. To ensure control is exercised in the correct way on a member’s death it can be useful to include a provision which appoints the member’s legal personal representative as a trustee or director. This may be required before any decision is made concerning distribution of the death benefits.

Why take the trouble?

Ensuring the trust deed is up to date, binding death benefits are valid and trustees take an active interest in the fund may result in avoiding disputes that could end up in the courts. Being prepared may be the best form of defence as it will help place the fund in a stronger position that may end up justifying the actions of the trustees and payment of the death benefit.

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Important notes

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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