Superannuation has grown to become the largest or second-largest asset for the majority of Australians.
The combined total of superannuation accounts in Australia means that this country has the third largest pension fund assets in the world (behind only USA and UK with their much larger populations).
It is a surprise to most Australians to learn that their retirement savings are held in trust, and a shock for them to discover that the terms of that trust frequently reserves discretionary powers to the trustee(s) of that trust, such that the beneficial ownership of the trust property following the death of the contributing member is not necessarily easily predictable.
Superannuation death benefits do not automatically form part of an estate and therefore cannot be primarily dealt with in a Will.
It is critical to understand how superannuation death benefits are paid so that an appropriate estate planning strategy can be developed.
Death is a compulsory trigger condition – where the super death benefit must be paid from the superannuation fund in some form after the death of a member.
There are many elements that interact together and must be considered and balanced in light of the various strengths and weaknesses when dealing with superannuation death benefits, including:
- the terms of the trust deed, which are paramount, and the applicable trust law;
- the requirements of the Superannuation Industry (Supervision) Act 1993 and Regulations 1993 (the SIS Act and SIS Regulations);
- the tax implications on superannuation death benefits under the Income Tax Assessment Act 1997; and
- where there is a trustee company, the terms of the constitution and the application of the Corporations Act 2001.
All super funds in Australia are trusts. The SIS Regulations set out how and to whom the superannuation death benefit can be paid, but within that class provides the trustee with an absolute discretion.
Australian super law provides for 5 different death benefit arrangements, each with its own requirements and consequences:
- automatic reversionary benefit (where trustee exercises no discretion);
- non-binding nomination (where there is full trustee discretion);
- binding nomination (under section 59(1A) of the SIS Act) ;
- non-lapsing nomination (under section 59(1)(a) of the SIS Act); or
- complete discretion of the trustee if none of these nominations has been made and the reversionary benefit is not applicable.
It is important to consider your superannuation entitlements as part of your estate plan especially when they are not automatically captured by your Will.
As superannuation entitlements can result in significant distributions to beneficiaries, it is crucial to ensure that they are paid in accordance with your wishes.
A non-binding nomination provides guidance to your superannuation fund about how to distribute your superannuation on your death but they are not obligated to follow it.
The trustee of the superannuation fund (Trustee) has the final say on who receives your superannuation on your death and your entitlements may not end up being paid to your intended beneficiaries.
A binding death benefit nomination (Binding Nomination or BDBN) allows you to ensure that your superannuation is paid to your intended beneficiaries.
A superannuation fund is required to comply with a valid Binding Nomination. However not all super funds allow all 5 types of death benefit nominations, so you need to check to confirm if your super fund offers BDBN as an option.
Here are some of the key points that everyone should know about Super BDBN:
1. Not everyone can be nominated
You cannot name just anybody in a BDBN. A Binding Nomination can only be made in favour of specific categories of people, such as your legal personal representative (ie your estate), your spouse, your children or someone who has an interdependency relationship with you.
For the purposes of superannuation, an interdependency relationship is one where two people have a close personal relationship, live together and one or each of them provides both financial and domestic support and personal care.
2. Binding Nominations may lapse or expire
Many retail and industry super funds require that Binding Nominations expire every three years.
However, some superannuation funds have an option for a non-lapsing Binding Nomination, which means they do not expire and remain in place until they are revoked.
As long as you retain your capacity, you are generally free to revoke or change your lapsing or non-lapsing Binding Nomination at any time.
3. Binding Nominations need to be prepared carefully
In order for a Binding Nomination to be valid and to ensure that your wishes are carried out, Binding Nominations must be prepared very carefully.
Generally, each nominee must be an eligible nominee as set out above, the total of the allocations for each nominee must add up to 100% and it must be witnessed properly.
Binding Nominations must be witnessed by two people over 18 years of age and the witnesses must not be named in the Binding Nomination or named in your will, if you nominate your legal personal representative.
Additionally, where a Binding Nomination is made for a Self Managed Superannuation Fund (SMSF), it is important to precisely follow the terms of the SMSF’s trust deed to ensure its validity.
4. Binding Nominations must be sent to the trustee
To be effective, a Binding Nomination must be given to the Trustee. Unlike a Will, you cannot simply make a Binding Nomination and forget about it. The Trustee must be aware of the Binding Nomination to be bound by it.
5. Binding Nominations affect more than just your superannuation
Superannuation can often include more than just the contributions made by your employer or you over your lifetime.
Total and permanent disability insurance and life insurance policies held within a superannuation environment will be paid into your superannuation fund prior to it being paid to the ultimate beneficiary.
In this case, the Binding Nomination will also apply to how those insurance proceeds are paid.
In summary, as payment of superannuation entitlements after your death can result in significant distributions to your beneficiaries, you should consider a Binding Nomination when preparing your overall estate plan to ensure your wishes are carried out.
Contact the oldest law firm in South Australia – Genders and Partners, established 1848, to learn more about superannuation, estate-planning and estate-administration solutions, by visiting our website today and schedule a free no obligation telephone consultation to find out how we can help you and yours.
This article should serve as a strong warning that a Will alone is not the only document you need for an estate plan.
Without a BDBN, Advance Care Directive, power of attorney, trust, or guardianship you may not be providing for your family as you intend.
Remember – any mistakes you make in your Will won’t become apparent until after you’re dead, and it’s too late for you to fix them.
It is also vitally important that you keep your Will and estate plan up to date – it is not a set-and-forget exercise.
To learn how to protect yourself, your family and your assets, by creating a professionally-made estate plan, claim your FREE 15 minute Telephone Consultation
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