As another calendar year is coming to an end, for some people, this is a time where they consider reviewing their estate planning affairs. Not exactly a topic to be discussing over Christmas lunch or New Year celebrations, however as they say “it’s better to be prepared”.
You may already have a SMSF but don’t have a death benefit nomination in place – where should you start? Some other questions which might come to mind might be:
What Happens to My SMSF When I Die? Doesn’t It Just Form Part of My Estate?
It depends. As every SMSF is unique and each has their own set of governing rules, the answer to this question will depend on what is written in those rules. However, as a general rule, superannuation assets do not automatically form part of your Estate as there is some complexity in trying to bequeath it via a Will. So, to make this connection between the SMSF, this is where death benefit nominations can be used.
What is a Death Benefit Nomination?
A death benefit nomination is a direction to the trustee of the SMSF as to how a member’s superannuation benefits are to be distributed upon their death. This is because once a member of an SMSF dies, their benefits must be allocated to or amongst the member’s dependents, which includes their Estate.
What Types of Death Benefit Nominations Are There? How Are They Different?
There are essentially two types – binding and non-binding death benefit nominations.
As their names suggest, a binding death benefit nomination provides certainty as to whom the benefits will be distributed to as the SMSF trustee is required to adhere to the instructions set out in the nomination. This can provide “peace of mind” as everyone knows in advance the member’s wishes prior to them passing and therefore removes a possible source of conflict. Also, this provides the trustee the added simplicity of not having to contact all potential beneficiaries prior to deciding on the death benefit payments.
Whereas, for non-binding death benefit nominations the SMSF trustee has the discretion and hence flexibility to allocate the death benefits as they see fit. Even though the instructions are not binding, this type of nomination provides a clear indication of the member’s preferred wishes. By removing the certainty in instructions, you then have the time consuming and sometimes costly process of having to contact all potential beneficiaries prior to determining how death benefits are to be paid. This can also result in the deceased member not being able to “rule from the grave.”
What Happens if I Decide Not to Make a Death Benefit Nomination? Can’t My Spouse Sort It Out Since I Want Them to Receive All of It Anyway?
Only a current spouse, including de facto partners and same sex partner, can receive superannuation death benefits. Former spouses cannot.
If there is no valid binding death benefit nomination in place (including not having any at all) and the spouse is the executor of the deceased member’s estate, they may find themselves having to wear two hats – one which comes with the fiduciary duties of administering the estate as an executor, and the other as a potential recipient of death benefits – which may give rise to a risk of legal challenge due to the conflict of interest in their role. Depending on the complexity of the estate, this may require the spouse to forgo the executor role to mitigate a possible dispute, but then this is in contradiction of the deceased member’s wishes.
How do I ensure the death benefit nomination is valid?
This will depend on the requirements of each death benefit nomination and/or the fund’s governing rules. However as a general rule, a valid nomination would need to be in writing and specifies whom the recipients of the death benefits are. Some nominations may require the “form” of payment as well. (eg. lump sum or pension).
Do I Need to Renew the Nomination Every 3 Years?
Possibly as each SMSF is unique and this will depend on the requirements of each death benefit nomination and/or the fund’s governing rules. There are definitely nominations which automatically lapse after 3 years and others that are non-lapsing.
As with all Estate Planning documents, these should be reviewed regularly to ensure they remain suitable for one’s needs. Our lives change as each year goes by, as does the lives of the those we wish to receive our superannuation benefits. Therefore, keeping death benefit nominations up-to-date are an integral part of ensuring one’s legacy continues smoothly.
Author: Anna Wong – Senior SMSF Manager at Premier SMSF Solutions
*Correct as of 28 November 2023
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is for general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.
