SMSF / SMSF Strategy

What type of death benefit nomination is right for me?

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The preparation of a Death Benefit Nomination (DBN) is one of the most important documents completed by a member of a SMSF.

It is a common misconception that a person’s Will covers super benefits held on behalf of the member.  This is simply not correct.  The direction of benefits in the event of death need to be considered under the direction of a death benefit nomination by the member, subject to it being valid in accordance with the fund’s governing rules (trust deed) and superannuation law.  Therefore, a deceased person’s Will has no legal standing to deal with superannuation benefits (unless they have been directed there by the member via a DBN).

What type of nomination should I make?

When it comes to completing a Death Benefit Nomination there is no hard and fast rule as to the best way to pay out a member’s superannuation death benefit. Consideration needs to be given for each member in respect to tax, social security, outstanding debts and so on.  The short answer is that it is likely to be different for every individual, subject to their personal circumstances.

The decision as to what type of nomination should be made when determining how to deal with the payment of death benefits comes down to you deciding the appropriate mix of:

  1. How much flexibility you want your beneficiaries to have over the decision; and
  2. How much control you want to have over the payment of funds to specific beneficiaries and in what form

A super benefit can be paid to the deceased member’s estate in which case it will be then covered by the deceased member’s Will, however this may not be the most beneficial method from a taxation and needs basis. A member needs to be particularly careful about making a binding nomination to be paid to their estate as it is likely to significantly disadvantage a dependent beneficiary who could have taken benefits as an income stream. As a default final option, benefits are paid to the deceased member’s estate anyway, so there is no real need to nominate it. Therefore, appropriate consideration needs to be given to any instructions that a member may wish to leave regarding the direction of their superannuation in the event of death.

A member that sets out their instructions within a death benefit nomination provides an important blueprint or plan on how they seek to provide the payment of these death benefits to their Dependants or Legal Estate.

Under the Superannuation Laws there are several possibilities in respect to the payment of death benefits:

  • The provision of a Superannuation Lump Sum – by way of cash or Assets to Dependants and/or the deceased Member’s Legal Estate.
  • The payment of a Superannuation Income Stream to Dependants (as defined for taxation purposes) of a deceased Member.
  • The payment of a Reversionary Superannuation Income Stream to a Dependant. This is the continuation of an existing Superannuation Income Stream that was payable to a deceased Member of the Fund.

Types of Death Benefit Nominations within an SMSF

There are several options available to SMSF members regarding the possible methods of distribution that are available under superannuation law, however they must also be contained within the fund’s governing rules to ensure that such a nomination is valid (to be paid).

1. No Nomination in place

If the Member does not make a nomination then the Trustee has the discretion to determine where a deceased Member’s Death Benefits are to be distributed.  In this instance, the distribution of the deceased Member’s Death Benefits are totally at the unfettered discretion of the Trustee.

2. Non-binding (standard) Death Benefit Nomination

The Member provides the Trustee with a nomination as to how some or all of their Death Benefits may be distributed.  Ultimately, the Trustee retains control of the distribution of the Death Benefits. This method may apply where a Member’s Death Benefits are to be distributed to a single beneficiary, for example a spouse, who is to remain as the major Trustee of the Fund. This is nomination is commonly known as a non-binding, standard or discretionary nomination.

3. Binding Death Benefit Nomination

A Binding Nomination is quite popular in retail and industry based superannuation funds. These allow a Member to direct the Trustee of the Fund in what proportion their Superannuation Benefits are to be paid in the event of their death. Upon a Member’s death the Trustee must abide by the direction provided in the Member’s Binding Nomination only if the Member’s Death Benefit Nomination Member’s is valid and current.

There are specific requirements to be found in the Super Laws for a binding DBN to be valid. The advantage of a Binding Nomination is that it provides some certainty as to how the Member’s Death benefits are to be paid.

Whilst all other superannuation funds must comply with the requirements of SIS Reg 6.17A of the SIS Regulations and section 59(1A) of the SIS Act, the Commissioner has confirmed his view in a SMSF determination, SMSFD 2008/D1 (finalised) that SMSFs are not bound by the three year ‘review and renew’ process. That is, a binding nomination typically has a maximum three year period of being valid before it is required to be renewed.  These requirements do not apply to SMSFs and that a binding nomination can be non-lapsing should the trust deed allow for it (i.e. they can apply indefinitely). However, many SMSF Trust Deeds require that Binding Nominations need to be renewed every three years. Binding Nominations have their benefits in a Complying SMSF but can also have disadvantages.

4. Death Benefit Rule or “SMSF Will”

A Death Benefit Rule provides for the death benefit instructions of the member to become a rule of the fund. It allows the Member to direct the Trustee as to how their Death Benefits are to be distributed and in what form. Additionally, it can direct the Trustee as to who the deceased Member’s Replacement Trustee is to be.

Upon the Member’s death the Trustee is to review the Death Benefit Rule. In accordance with the Trustee’s discretion, the Trustee can accept all or part of this rule. This is subject to the availability of the Member’s Superannuation Interests, the Superannuation Laws and the Rules of the Fund.

Additionally, the Trustee may qualify what terms and conditions are to be incorporated into the Rules of the Fund. How Death Benefit Rules are to be varied may also be noted as part of the terms and conditions of the Rules of the Fund. This approach provides a Member with the most secure option in terms of their requirements.

An SMSF Will allows a member to maximise the tax efficiency of their SMSF estate leaving specific benefits to dependants, non-dependants and legal estate.  In addition, it puts the deceased member’s executor in the place of the deceased as a trustee of the fund upon death until the instructions of the SMSF Will are carried out.  The SMSF Will has been designed in such a way to pay out specific assets of the funds to beneficiaries, much the same as a specific bequest in a Will.

The decision matrix

Having given regard to the various options available to a member regarding the different death benefit nomination options, selecting what is most appropriate never a simple task.  As a result, to assist in working through the options available, the following decision matrix has been created to assist members to assess which death benefit nomination is right for me?

Considerations when choosing between a binding and non-binding death benefit nomination

I have outlined below a list of things to consider when deciding whether or not to bind a death benefit nomination:

Binding DBN

  • There is a need to constantly monitor the member’s nomination to ensure that their wishes are still adequately met otherwise the benefit may be paid as per their latest nomination (e.g. a despised former spouse still nominated on your statement).  This is important for SMSFs that can provide for non-lapsing nominations.
  • If the Trust Deed requires the nomination to be reviewed and renewed every three years and is not revisited within the relevant timeframe, the surviving trustee(s) may determine how the member’s benefit will be paid (unless contravenes SIS).  If the member dies and the nomination has not been renewed then the benefit may be paid out in a way that is totally different to what was intended.
  • A member’s dependent circumstances may change between the time they make the nomination and when the payment is made – e.g. a family member may be incapacitated and become or remain a financial dependant.
  • Specifying that a beneficiary can only get a pension may leave them in a bad situation if they have a need for a lump sum (i.e. illness or accident).
  • A binding nomination is only valid if the following conditions are met:
    • Each nominated beneficiary is a dependant and/or legal personal representative
    • The member clearly states the allocation of their benefit between beneficiaries (i.e. the allocation must total 100%)
    • The notice has been signed and dated by the member and two witnesses (not listed as beneficiaries)
    • The nomination is not older than three years from the date of signature (only relevant for SMSF Trust Deeds that impose a review and renew condition)
    • The nominated beneficiaries are still dependants as at the date of death.
  • If a member’s nomination is invalid the benefit (or relevant part of it) will be paid to their Legal Personal Representative (executor).  This may not be the most effective outcome as the preference may have been to split among the remaining nominated beneficiaries.

Non-binding DBN

  • The trustee(s) remaining after your death have ultimate say as to how the member’s benefit will be paid and to who irrespective of whom is nominated. This can be good or bad as it provides the flexibility to make a more appropriate allocation but could also create problems. For example – Mum and Dad are members of the fund, and Dad dies. One of the children of the two children (both adults) is appointed as individual trustee within Mum. When Mum passes away, the trustee child could pay all the benefits to themselves as there are no further dependants.
  • Decisions made by the Trustee(s) can be contested – e.g. if the Trustee(s) paid the benefit entitlement to children of a former marriage (even if done in accordance with the deceased wishes), the children of the current marriage could contest.

I believe that the ultimate choice will depend on the member’s needs and potentially how well the family ‘unit’ operates.  Whilst happy families may exist currently, this may not be the case after the member has died and several pairs of hands are after the cash and assets of the fund.

The SMSF sector now has some fairly well known case law around the application of death benefit nominations for the payment of death benefits. These include , including Katz vs. Grossman and Donovan vs. Donovan, which makes one consider in a little more detail about which death benefit nomination is right for them.

P.S. I am currently in the process of preparing a free e-book on this topic, “which Death Benefit Nomination is right for me?” which will expand on what has been discussed in this blog.  This free e-book will cover:

  • The types of death benefit nominations in further detail
  • an explanation of the decision matrix
  • considerations in choosing between a binding and non-binding nomination
  • who can be beneficiaries of the death benefit nomination; and
  • frequently asked questions (FAQs) about DBNs

Feel free to add comments about other areas of interest to include in this free e-book.  Once this is available, I’ll make the readers aware via my blog and also on twitter.



3 thoughts on “What type of death benefit nomination is right for me?

  1. I like the idea of the e-book. Just wondering if you could include some reference to the type of death benefit nomination required to ensure that any unused super entitlements form part of the estate so that the adult children and non-adult grandchildren can take their inheritance via a testamentary trust.

    • Thanks Stephen for your words on the e-book. We are actually in the process of updating this at the moment as part of our webinar this month. We ensure we’ve got this covered off.


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