News / Jan 21, 2022

What is a Binding Death Benefit Nomination For Your SMSF?

Mark Phillips
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If you are an SMSF accountant or financial adviser, or an SMSF trustee grappling with the intricacies of binding death benefit nominations (BDBNs), we can help you.

SMSF Engine are experts in all aspects of self-managed super fund administration. Our in-depth experience of self-managed super funds stretches back to 2004.

Our major clients are SMSF accountants and financial advisers. We lift the administrative load of managing multiple funds and leave accountants and advisers free to give strategic and investment advice to their clients.

We offer an SMSF establishment service, making sure that your SMSF is set up correctly and all your documentation is in place. We have a deed of variation service to ensure that trust deeds are updated to align with the latest legislation and regulations and ensure the validity of BDBNs. 

See our fees for Establishment and Deed Services

Get a quote for bulk SMSF deed update

Let’s understand why these services are essential.

Misconceptions of Binding Death Benefit Nominations in an SMSF

A common misconception is that death benefits in an SMSF will automatically be distributed according to the deceased member’s will.

This is not true.

They will be distributed according to the discretion of the remaining trustee(s), taking into account the trust deed and superannuation law. The deed must be followed, even if it is different to the member’s will.

Fortunately, SMSF members can control what happens to their superannuation benefit through a binding death benefit nomination (BDBN).

If there is a valid BDBN, the super fund trustee must pay the nominated person(s). Payment can be a lump sum (in cash or a transfer of assets) or a pension.  

As for many things with SMSFs, everything is not as simple as it seems. 

  • What is a valid BDBN? 
  • What must be in the trust deed? 
  • What legislation applies? 
  • What about the will?

The answers can be complicated, but if you get them wrong, there is a risk that your superannuation fund benefits will go to the wrong beneficiary.

In addition, SMSFs must go to the High Court to challenge any distributions, rather than to the Superannuation Complaints Tribunal like other super funds. This can be very expensive and time-consuming. 

This is an area where trustees should seek professional advice.

What Is a Valid Binding Death Benefit Nomination (BDBN)?

A binding death benefit nomination is a notice given by a member to the trustee detailing how and to whom death benefits are to be distributed.

To be valid:

  • It must align with the trust deed
  • It must be in writing
  • It must be dated and signed
    • By the member
    • By two witnesses (older than 18 and not beneficiaries)
  • The beneficiaries can only be 
    • Your superannuation dependants, or
    • Your legal personal representative
  • The percentages allocated to the nominated beneficiary(ies) must total 100%

To be legally binding:

  • It must be valid
  • It must be in line with superannuation law and regulation

If there is any non-compliance, the nomination becomes non-binding, and the remaining trustee(s) may have discretion about how benefits are paid. 

An SMSF member can also make a non-binding nomination, making suggestions but leaving the decision-making power with the trustee (often the spouse).  

However, trustees do not have absolute discretion. (More on this later)

Let’s look at binding death benefit nomination SMSF requirements in more detail.

binding death benefit nomination smsf

Beneficiaries of a Binding Death Benefit Nomination SMSF

Only superannuation dependants or a legal personal representative can be beneficiaries.

Superannuation Dependants

Superannuation dependants are

  • Your spouse
  • Your children (of whatever age)
  • A person who is financially dependent on you, or
  • A person with whom you are in an interdependency relationship

Definitions for these categories are given in Section 10(1) of the Superannuation Industry (Supervision) Act, 1993 (SIS Act). 

An interdependency relationship is characterised by:

  • A close personal relationship with another person
  • You live together
  • Either of you provides the other with financial support; and
  • Either of you provides the other with domestic support and personal care.

There is still an interdependency relationship if these requirements are not met because either party has a physical, intellectual, or psychiatric disability.

You do not meet the definition if one party is employed to provide domestic support and care.

Legal Personal Representative

A legal personal representative is defined in SIS 10(1), as

  • The executor of the will or administrator of the estate of a deceased person
  • The trustee of the estate of a person under a legal disability, or 
  • A person who holds an enduring power of attorney granted by a person

If the BDBN nominates the legal personal representative, the death benefit will be included in the deceased’s estate and distributed in terms of the will.

Find out more about enduring power of attorney 

SMSF Trust Deeds And BDBNs

An SMSF trust deed sets out the governing rules for establishing and operating the fund. A binding death benefit notice is not legally binding if it contravenes one of the rules or if there is not a rule that allows for it.

Some considerations are crucial for ensuring the validity of a binding death nomination:

Inclusion Of BDBNs In SMSF Trust Deeds

SMSF deeds must specifically indicate that BDBNs are permitted and how they should be executed. Silence on the subject does not mean that trustees will follow the deceased member’s wishes.

Lapsing And Renewal Of BDBNs

There is some debate about whether SMSFs are required to renew BDBNs every three years. 

SIS Regulation 6.17A And The 3-Year/2 Witnesses Rule

According to SIS Regulation 6.17A, a BDBN must be renewed every three years to prevent it from lapsing. This same regulation requires signatures from two witnesses. Some experts believe that this three-year/two witnesses rule applies only to APRA-regulated superannuation funds. It is not a binding death benefit nomination SMSF statutory requirement.

However, to avoid possible challenges to a BDBN, many advisers suggest abiding by the regulation. It is, in any event, wise to regularly check a BDBN to ensure that it remains relevant to the member’s current circumstances. These might include commencing pension, divorce, remarriage, or changes in the dependency status of children.

Non-Lapsing Or Permanent BDBNs

An SMSF can have a clause in the trust deed allowing for non-lapsing or permanent BDBNs. The BDBN will then remain in place indefinitely unless it is revoked by the member and replaced with a new one.

Alignment Of The Trust Deed, Superannuation Legislation, And The BDBN

SMSFs are trusts governed primarily by the Superannuation Industry (Supervision) Act 1993 (SIS Act) and any associated updates or regulations.

Aligning The Trust Deed With Legislation

The trust deed must reflect the current laws and regulations (including tax and family law). Or the wording must make it clear that trustees will act per the latest legislation.

Section 55A of the SIS Act stipulates that the rules of the fund must not permit the payment of death benefits that in any way deviates from the required standards. If it does, the trust deed itself can be declared invalid.

Aligning The BDBN With The Trust Deed

In addition, the trust deed and the BDBN must be aligned. It might be necessary to update the trust deed before a BDBN is prepared. An SMSF Deed of Variation is used to replace old/obsolete SMSF deeds.

Some pitfalls to avoid:

  • A BDBN can be invalid if the trust deed is upgraded and some provisions from previous versions that impact the BDBN are not included.
  • If there have been several updates to the trust deed over the years and there was an error in one (for example, it was not signed), all subsequent versions could be challenged.
  • Missing documents can invalidate a BDBN – for example, a change was made to a BDBN, but no copy is available to substantiate it.
  • Nominated beneficiaries may die before the member, which would make the BDBN invalid. 
  • A beneficiary nominated to receive a pension rather than a lump sum may no longer be financially dependent.

Be sure to get legal advice from SMSF specialists if you are making any changes.

What Is SMSF Trustee Discretion?

If a BDBN is valid, the SMSF trustee must abide by the nominations when the SMSF member dies.

If it is not valid for any reason (for example, a nominated beneficiary is a non-dependant), and the trust deed does not give direction, then the trustee can exercise discretion regarding payments. 

However, trustees do not have absolute discretion.

For example, there is no discretion if the member was in a retirement phase income stream with a nominated reversionary pensioner (the pension will continue but to a different person). The income stream is contractually paid to that reversionary pensioner.

The next step is to refer to the trust deed. Assuming the deed allows for binding nominations, they are looked at. Then, any non-binding nominations are considered.

If the trust deed gives some direction, it must be followed. For instance, it might state that the benefit has to be paid to the estate. Or it might give discretion to the trustees.

If the benefit is to be paid under trustee discretion, then 

  • They could elect to pay the benefit to the estate to be dealt with by the will. 
  • Alternatively, they must determine from amongst the deceased’s dependents how the benefit is to be paid 
    • To one or more, 
    • As a lump sum or income stream, if allowable, and
  • The beneficiary/ies must still meet the definition of dependent.

Of course, all these decisions can be challenged by anyone who is disgruntled by the outcome.

Reviewing And Updating SMSF Trust Deeds And BDBNs

It’s vital to review trust deeds from time to time. A deed of variation can ensure the governing rules of an SMSF are up-to-date. 

At the same time, the BDBN can be aligned with the trust deed.  

SMSF members and trustees have peace of mind, knowing that the law and the deed have been considered when making death benefit plans.

Contact SMSF Engine to update your Trust and BDBN documents

Get a quote for bulk SMSF deed updates

Meet our business partners

SMSF Engine has strong ties to Australia’s foremost Tax Advisory body, the National Tax and Accountants’ Association (NTAA).

NTAA has endorsed us as the recommended administrator for their members.

NTAA Corporate is an Incorporated Legal Practice with in-house solicitors to oversee the establishment of and variations to Self Managed Superannuation Funds.  

NTAA Corporate also specialises in the establishment of Companies and Trusts.

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