Most super fund members have come across a ‘binding death benefit nomination’ (BDBN). In its most simple format, it is a written piece of information, usually a completed form from the member of a super fund to the trustee, expressing who and how much they want to leave their super to, when they die.
As super is not an asset of their estate, a member cannot just leave it to anybody.
Members have only two choices – to their estate or to one or more of their dependents. A dependent can include a spouse, a child of any age, or someone they share an ‘interdependency relationship’ with, such as a person with a disability or someone with whom they share personal, financial, and domestic care.
It sounds easy and members may be under the impression they can write it, send it to the trustee and be done with it. But it is not as simple as that and there are some pitfalls to be mindful of.
Lapsing vs non-lapsing BDBNs
It is important to understand the difference between lapsing and non-lapsing BDBNs.
A lapsing BDBN is one that remains valid for three years. If the member does not update it after that, it essentially lapses and becomes a non-binding death benefit nomination.
So upon their death, the trustee of the member’s fund is legally obliged to decide where their money ends up. That could be very different to their original intentions but if the member has kept it up to date then the trustee legally must follow their instructions.
For most employee or public super funds, members can have the choice of whether to have a lapsing or non-lapsing BDBN. They can check their super fund, of course, to see whether it offers a non-lapsing BDBN. If they choose this, their nomination to the trustee will be in place until their death, unless they change or cancel it.
If a member has a self-managed super fund, the conditions under a BDBN are likely to be different again. Most commonly, a spouse is the trustee of an SMSF, and they will also usually be the executor.
The conditions under which BDBNs operate also vary. For example, the need to renew BDBNs every three years does not normally apply to an SMSF unless it is specifically written into the trust deed.
Again, the same two choices apply as to who a person can leave their super to − their estate or to one or more of their dependents.
In terms of court rulings, their SMSF trust deed is the ultimate decider and is effectively the rule book on what their fund is and is not allowed to do, including how their funds are distributed when they die.
Don’t set and forget
It is critical a member does not make the decision to set and forget too quickly as it can also work against their intentions if their circumstances change, for example if a person divorces and they have not updated their trust deed.
The remaining trustee or trustees of an SMSF are still obligated to distribute the deceased trustees’ benefits but not before considering all eligible beneficiaries. Unfortunately, this is where conflict can arise with beneficiaries contesting for a greater share of the deceased member’s funds.
Sometimes a member has the case where there is either only a single trustee or there has been some sort of relationship breakdown and the surviving trustee is not actually trusted to distribute the funds in the way the deceased wanted.
In this situation, it is handy to appoint a legal personal representative (LPR) to represent the member at the trustee level, to help achieve their financial outcomes.
Leaving it to the estate
When a member leaves their super to their estate, they actually need to nominate their LPR as their beneficiary.
This means their BDBN should be part of a wider estate plan and an up to date will that directs where their super goes is a must for this step.
The LPR is the executor of their will and is legally bound to deal with their BDBN in accordance with the terms of their will. In this instance, it is important they know who they are appointing as executor and that they trust this person implicitly to do the right thing.
They need to be careful, especially where super is their main asset, that in situations where there might be blended families and issues between ex-spouses and children, leaving their super to their estate can be another layer where things can go wrong.
It might be far easier to make a binding death benefit nomination directly to their intended beneficiaries rather than their estate. It can be more tax effective as well.
In some instances, a trustee company can be appointed as executor in order to administer the estate. The benefit in this is that they are an independent professional, with no vested interest in who the money goes to.
Their sole objective is to comply with the terms of the will and have more oversight and governance − a greater guarantee that a member’s super will end up where they want it to rather than appointing family members or friends as executors, who might not do the right thing.
Members must avoid the the mistake of signing their BDBN in favour of their LPR and then dying intestate, or in other words, without a will.
While their super is still likely to go to their dependents, they lose that control, in addition to making it contestable by others.
If a member has a non-lapsing BDBN and they have left their super to their estate, then they have to make sure they update their will every time their circumstances change.
For example, they do not want to direct funds to an individual via their will only to find out they have a gambling problem later in life. It is important to maintain these documents as live documents, not chiselled in stone. Also, again they need to be fully aware of the tax implications of having the benefit paid to their estate.
If a member changes their BDBN but then forgets to change their will, their BDBN will prevail and usually overrule the clause or statement in their will that deals with their super.
Suzie Willis is a senior solicitor at Equity Trustees.