It might sound complex and in the too-hard basket, but a binding death benefit nomination is super important, says Suzie Willis.
If you have superannuation, which most of us do, it’s likely you’ve come across a ‘binding death benefit nomination’ (BDBN). In its most simple format, it’s a written piece of information, usually a completed form from you as the member of a super fund, to the trustee expressing who and how much you want to leave your super to when you die.
Since super is not an asset of your estate, you can’t just leave it to anybody. There are only two choices – to your estate or to one or more of your dependents. A dependant can include a spouse, a child of any age, or someone you share an ‘interdependency relationship’ with, such as a person with a disability or someone with whom you share personal, financial, and domestic care.
It sounds easy and you probably think you can write it, send it to the trustee, and be done with it. But it’s not as simple as that and there are some pitfalls to be aware of.
First of all, it’s important to understand the difference between lapsing versus non-lapsing BDBNs.
A lapsing BDBN is one that remains valid for three years. If you don’t update it after that, it essentially lapses and becomes a non-binding death benefit nomination. So upon your death, the trustee of your fund is legally obliged to decide where your money ends up. And that could be very different from your original intentions. But if you’ve kept it up to date then the trustee legally must follow your instructions.
For most employee or public super funds, you can have the choice of whether to have a lapsing or non-lapsing BDBN. Check your super fund to see whether it offers a non-lapsing BDBN. If you choose this, your nomination to the trustee will be in place until your death, unless you change or cancel it.
If you have a self-managed super fund (SMSF), 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. Also, the conditions under which BDBNs operate vary. For example, the need to renew BDBNs every three years doesn’t normally apply to an SMSF unless it is specifically written into the trust deed.
Again, the same two choices apply as to who you can leave your super to – your estate or to one or more of your dependents. In terms of court rulings, your SMSF trust deed is the ultimate decider and is effectively the rule book on what your fund is and isn’t allowed to do, including how your funds are distributed when you die.
But, don’t make the decision to set and forget too quickly as it can also work against your intentions if your circumstances change, for example, if you divorce, and you haven’t updated your 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 you have the case where there is either only a single trustee or there has been some sort of relationship breakdown and the surviving trustee isn’t actually trusted to distribute the funds in the way the deceased wanted. In this case, it’s handy to appoint a legal personal representative (LPR) to represent the member at the trustee level, to help achieve their financial outcomes.
Did you know that leaving your super to your estate means you actually need to nominate your LPR as your beneficiary? This means your BDBN should be part of a wider estate plan and an up-to-date will that directs where your super goes is a must for this step.
The LPR is the executor of your will and is legally bound to deal with your BDBN in accordance with the terms of your will. In this instance make sure you know who you are appointing as executor and that you trust this person implicitly to do the right thing.
I remember the case of a man who appointed his second wife as an executor. Five years later she still hadn’t executed the will, had sold off all the personal items, and was living in the family home. The kids still hadn’t seen the superannuation!
It’s the last thing you want to happen. So be careful, especially where super is your main asset, that in situations where there might be blended families and issues between ex-spouses and children, leaving your super to your estate can be another layer where things can go wrong. It might be far easier to make a binding death benefit nomination directly to your intended beneficiaries rather than your estate. It can be more tax effective as well.
In some cases, a trustee company can be appointed as executor in order to administer the estate. The benefit of 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 your super will end up where you want it to rather than appointing family members or friends as executors, who might not do the right thing.
Don’t make the mistake of signing your BDBN in favour of your LPR and then dying intestate, or in other words, without a will. While your super is still likely to go to your dependents, you lose that control, in addition to making it contestable by others.
If you have a non-lapsing BDBN and you’ve left your super to your estate, then you have to make sure you update your will every time your circumstances change. For example, you don’t want to direct funds to an individual via your will only to find out they have a gambling problem later in life. It’s important to maintain these documents as live documents, not chiseled in stone. Also, again be fully aware of the tax implications of having the benefit paid to your estate.
If you change your BDBN but then forget to change your will, your BDBN will prevail and usually overrule the clause or statement in your will that deals with your super.
To find out whether you have a lapsing or non-lapsing BDBN, check your super statement and ring or email your super fund. They should be able to provide you with a copy or help you access it online. Just like your other assets, be aware of what you have in place for your super, no matter what your age, and know and control ultimately where your benefit will end up.
* Suzie Willis is Senior Estates and Trusts Solicitor at Equity Trustees.