What does a binding death benefit nomination mean?

Spring cleaning, meal prepping, and planning for your death. These things are no fun to do, but can provide huge value and peace of mind in the long term.

One part of estate planning that is often overlooked is deciding where your superannuation might go if you were to pass away. 

While you might assume your super and other benefits – called death benefits – will simply be divvied up along with your other assets (and those daring shoes you’ve never had the heart to part with), that’s not the case. 

Unlike your house, car, and platform boots, you don’t technically own your super, even if you have a Self-Managed Super Fund (SMSF). Rather, your super is a trust that you’re a beneficiary of. 

That means, unless you specifically appoint a nominee to receive your super in the event of your death, your super fund will decide where the funds will go. 

What is a binding death benefit nomination?

A valid binding death benefit nomination is a request that a superfund – whether it’s an SMSF or not – legally has to follow. It demands exactly where your super is to go in the event of your death.

This means you can direct your super to be paid to your nominated beneficiaries, such as the executor of your will, your spouse, or your children.

Though, an SMSF’s trust deed must allow for death benefit nominations in order for such nominations to be valid. A binding death benefit nomination also generally needs to be renewed every three years to remain legally effective upon your death.

It’s wise to regularly review your will and other estate planning documents every few years anyway, so as to ensure they still reflect your current personal and financial situation, as well as the needs of your beneficiaries.

What is a non-binding death benefit nomination?

A non-binding death benefit nomination is similar to a binding death benefit nomination, but with one key difference: the superannuation trustee is not legally obligated to follow it exactly. Instead, it serves as a guideline for the trustee.

This means the trustee can consider other factors, such as the individual circumstances of dependents (like whether one person might need funds more than another), any relationship changes that occurred after the nomination was made, and potential tax minimisation strategies.

What happens to an SMSF on the death of a member?

If you have an SMSF, it’s worth stopping here for a moment to think about the trustee of your SMSF. 

If an SMSF has more than one member, chances are the surviving member/s will be the SMSF’s trustees or directors in the event of a member’s death. They will be responsible for determining the deceased member’s super balance and doling it out to their beneficiaries or their estate, according to the SMSF’s trust deed, super law, and any death benefit nomination.

In some cases, the deceased’s Legal Personal Representative (PLR) can be temporarily appointed as trustee for the purpose of managing the deceased member’s superannuation benefits.

It's essential to refer to the specific SMSF trust deed, as the exact process and responsibilities can vary depending on the provisions set out in the deed.

If you have a single-member SMSF, the ATO likely required you to appoint either a second trustee or a corporate trustee. You might know exactly who you appointed as the second trustee, and they may still be the person you trust to manage your superannuation after your death.

Though, you might have appointed your old neighbour, your ex-husband, or that mate you haven’t spoken to since he bet against the Broncos. Even though this person would be bound by the SMSF’s trust deed and superannuation laws, you likely don’t want them to have control over your superannuation funds after you pass away.

If you appointed a corporate trustee, it will distribute your SMSF’s assets according to the fund’s trust deed, superannuation laws, and any binding death benefit nominations, regardless of whether that aligns with your current wishes or your will.

That’s why it’s so important to establish a correct and valid binding death benefit nomination.

Who can receive your super in the event of your death?

Unlike other assets, which can be bequeathed to almost anyone, your superannuation (whether held in an SMSF or a traditional fund) can only be left to a dependant or your legal personal representative.

To be considered a dependant, a person must have one of the following relationships with you:

• Spouse
  Including de facto and same-sex partners.

• Child
  Regardless of age or whether they are biological, adopted, or ex-nuptial.

• Financial dependant
  Someone who relies on you for financial support.

• Interdependent
  A person with whom you share a close relationship, live together, and share financial and household responsibilities.

How to make a binding death benefit nomination for an SMSF

If your SMSF permits it, you can use a death benefit nomination form to direct or guide the SMSF trustee to distribute your super and death benefits according to your specific wishes.

This form may take many factors into consideration, including the trust deed of your SMSF.

For that reason, a person considering instating a binding death benefit nomination is encouraged to turn to an SMSF professional to do so.

Some of these professionals provide binding death benefit nomination form templates to potential customers, who could then scan the template so they’re aware of what to expect. 

Wills and inheritances can be a litigious minefield, so it’s important that you ensure your binding death benefit nomination is as water-tight as possible, particularly if you think it could be challenged after you pass.

It’s also worth noting that the death benefit nomination form must be signed by the SMSF member in the presence of two adult witnesses who aren’t nominated as beneficiaries on the form. So, if you’re about to reach out for professional help to create a binding death benefit nomination form, it might also be worth reaching out to a few willing witnesses.

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