Binding death benefit nominations in an SMSF can provide useful direction to the trustee of a fund after death, for distribution of benefits. However, over the past six months, we have noticed some common issues arising that need attention.
1. Issue: ‘Everything will be OK, my family will look after it.’
Many members of SMSFs make the incorrect assumption that just because it was all peace and harmony while they were alive, this will continue on their demise.
While most disputes are settled prior to getting to a court hearing, there are enough cases where the apparent intention of the deceased made clear during their life was never reduced to writing. The result is that unintended family members may end up with superannuation to the detriment of others.
Make sure that your intention to pay super benefits to particular family members is put in writing, as a binding direction to the trustee of the fund.
2. Issue: Not understanding who can make a claim or receive a superannuation death benefit.
The superannuation laws have strict rules around who can receive your death benefit. The law limits your superannuation death benefit to your dependants, plus it can be paid to your estate via your legal personal representative. Your dependants for super purposes include your spouse, children, anyone dependant on you for support and anyone with whom you have an interdependency relationship.
Make sure you are clear about who should receive your superannuation after your death.
3. Issue: Not understanding the place of superannuation in your last will and testament.
One misunderstanding is that your last will and testament can decide how your superannuation is to be distributed amongst your beneficiaries. This is incorrect, as the rules of your super fund initially determine how your super is to be distributed.
Your fund may allow you to make a binding death benefit nomination, which directs the trustee as to who is to receive your superannuation. This includes your dependants, and you can have your super paid your legal personal representative who is responsible to distribute the amount received as instructed in your will. If you don’t have a binding death benefit nomination, then the rules of the fund may allow the trustee discretion to distribute your super benefit to your dependants including to your estate via your legal personal representative.
Make sure you have a clear direction for the distribution of your superannuation otherwise payment may be up to the trustees of your fund after your death.
4. Issue: Incorrect binding death benefit nominations.
Many SMSFs have trust deeds which include standard binding death benefit nominations or require that the nominations follow a set format. If they do, then make sure any nomination that you sign is consistent with that nomination. You may find a standard nomination from the web to use or be provided with one from an accountant or adviser.
Make sure you use a nomination that satisfies the trust deed or distribution of your death benefit may be at the discretion of the fund trustees.
5. Issue: Incorrectly completed death benefit nominations.
We often see binding death benefit nominations that are incomplete or are incorrect. The information required to be included in the nomination will depend on the particular form, but it will usually include:
- the member’s name
- who the member nominates to receive the death benefit
- how much of the death benefit is to be paid to the dependant or legal personal representative
- any other instructions concerning payment of the death benefit
- the member’s signature and dated
- witnesses including the witness signature and dated
The binding death benefit nominations we see have one or more of these bits of information missing, which may render the nomination invalid or limit who may be eligible to receive the death benefit. If the nomination is considered invalid it may then rely on the fund trustee discretion for distribution of the death benefit.
Make sure your death benefit nomination has been completed correctly or it may be up to the trustee to decide how your death benefit will be distributed.
6. Issue: Not keeping the death benefit nomination up to date.
As things change during your life, you may wish to direct the payment of your superannuation to someone else. This may occur if you have children, change relationships or someone becomes dependent upon you for support.
Each time your family or relationship circumstances change review your death benefit nomination to see whether any change is required.
7. Issue: Failure to finalise a marriage breakdown.
Superannuation splitting usually is included as part of a marriage or relationship settlement. However, any binding death benefit nomination you have in place at the time of the settlement may still be valid and it is possible for benefits to be paid to your ex-partner.
As part of the settlement be sure to review your binding death benefit nomination and make any amendments necessary to take into account your changed circumstances.
8. Issue: Not addressing the legal competency of fund members.
Whether a trustee of an SMSF is competent to act in the interests of a deceased member is something that should be under consideration at all times. If the trustee is unable to act in that capacity, then who would take over the running of the fund?
To cater for this situation the trust deed of the fund or constitution of the corporate trustee should provide an alternative if the trustee or director of the corporate trustee become legally incompetent due to disability. Another option could be for the trustee to grant an enduring power of attorney to another person who could take over when they are unable to act.
Being prepared when a trustee is unable to act by using an ensuring power of attorney may allow an SMSF to continue in difficult times.
9. Issue: Not taking the specific makeup of an SMSF into consideration.
SMSFs operate in a unique way and may have investments which can be retained in the fund or transferred to the beneficiary as part of the payment of a death benefit. It is possible for a binding death benefit nomination to direct particular assets to one or more beneficiary.
Consideration needs to be taken of the fund’s assets in satisfaction of the payment of a death benefit. This may involve taxation issues, including income tax and stamp duty in relation to the transfer
10. Issue: Taking estate planning considerations into account.
Estate planning has become more important since the commencement of the transfer balance cap from 1 July 2017. The cap restricts the amount that can be used to start an income stream(s) in a superannuation fund, including death benefit pensions.
If a person becomes entitled to a reversionary or death benefit pension there is potential that their transfer balance cap of $1.6 million has been exceeded. This may require the transfer of part of the death benefit out of the fund as a lump sum. Depending on the wishes of the deceased it may be paid to a dependant or to their estate and have different tax consequences.
As part of deciding what is to happen with your death benefit the estate planning issues should be taken into account.
There’s a lot to think about…
It doesn’t matter whether you have an SMSF or belong to one of the larger super funds, the distribution of your death benefit should be made by the fund trustees as you want it. Any directions or instructions provided to the trustee must be clear and as required by the fund’s trust deed. Otherwise payment of your death benefit may be up to the trustee’s discretion and end up in the hands of someone you never intended.
Subscribe to SMSF News to receive my latest articlesGraeme Colley, Executive Manager, SMSF Technical and Private Wealth, SuperConcepts
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