The Dangers of Overlooking SMSF’s In Estate Planning

This is the first article in a three-part series examining Self-Managed Superannuation Funds in estate planning. This article considers the effectiveness of Binding Death Benefit Nominations. The following articles will address control and trustee succession, and the taxation of superannuation death benefits.

Self-managed superannuation funds (SMSFs) are an increasingly significant component of retirement, investment and intergenerational wealth planning in Australia. However, an SMSF cannot be dealt with solely through a member’s Will.

Superannuation is held in a separate trust structure and is governed by superannuation legislation and the fund’s governing rules, including its trust deed. A binding death benefit nomination (BDBN) may provide certainty about who will receive a member’s death benefit, but only if the nomination is valid and effective.

The existence of a signed document headed “Binding Death Benefit Nomination” does not, by itself, ensure that the SMSF trustee is bound by it.

Superannuation Does Not Ordinarily Form Part of the Estate

A member’s superannuation interest does not ordinarily form part of their estate on death. Instead, the death benefit remains an asset of the superannuation fund until it is paid by the trustee in accordance with the applicable law and the fund’s governing rules.

Accordingly, a Will cannot, by itself, direct an SMSF trustee to pay a death benefit to a particular person. A Will may govern the benefit if it is validly paid to the deceased member’s legal personal representative, generally the executor or administrator of the estate. However, the decision to pay the benefit to the estate must first be authorised or required under the fund’s governing rules and any effective death benefit nomination.

This distinction is important where superannuation represents a substantial proportion of a member’s wealth. An estate plan may carefully distribute personally owned assets but fail to achieve the intended overall outcome if the member’s superannuation arrangements are not properly coordinated with the Will.

What Is a Binding Death Benefit Nomination?

A BDBN is a direction by a fund member requiring the trustee to pay the member’s death benefit to one or more nominated recipients, provided the nomination is valid and effective when the member dies.

Payment of death benefits is governed by the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA) and the Superannuation Industry (Supervision) Regulations 1993 (Cth) (SISR). The default position is that a fund trustee has an absolute discretion as to the payment of death benefits. Except in limited circumstances, death benefits must be paid by a fund trustee to:

• one or more of the member’s dependants for superannuation law purposes;

• the member’s legal personal representative; or

• a combination of eligible recipients, where permitted.

The meaning of “dependant” for superannuation law purposes is not necessarily the same as its ordinary meaning or the meaning used under taxation law. Dependants is defined by section 10 of the SISA as:

• the member’s current spouse;

• any child of the member; and

• any person with whom the member has an interdependency relationship.

The distinction between a dependant under superannuation law and a dependant under taxation law can materially affect the tax treatment of a death benefit. Those taxation consequences will be considered later in this series.

The Trust Deed Is Critical

For an SMSF, the starting point for determining whether a BDBN is effective is the fund’s trust deed.

In Hill v Zuda Pty Ltd [2022] HCA 21 (Hill v Zuda), the High Court confirmed that regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth), which prescribes requirements for certain death benefit nominations, does not apply to SMSFs. The validity and operation of an SMSF BDBN therefore depend principally on the fund’s governing rules, subject to the broader requirements of superannuation law.

This means it should not automatically be assumed that an SMSF BDBN:

• must lapse after three years;

• must be witnessed by two adults;

• can be made non-lapsing;

• can be revoked in a particular way; or

• is valid because it follows a standard form used by another superannuation fund.

Each of these matters depends on the terms of the SMSF trust deed.

The decision in Hill v Zuda does not mean that SMSF nominations are free from formal requirements. Rather, it confirms that the requirements imposed by the SMSF’s governing rules must be identified and followed precisely.

When Will a BDBN Be Effective?

A BDBN will only achieve its intended purpose if it is valid and remains effective. Issues may arise where a nomination:

• has expired under the terms of the SMSF’s trust deed;

• does not comply with execution or witnessing requirements;

• nominates a person who is not an eligible beneficiary;

• incorrectly identifies the intended beneficiary;

• conflicts with other provisions of the fund’s governing documents; or

• has not been updated following a significant change in circumstances.

The trust deed should therefore be reviewed before preparing or updating a nomination. Members should also review their nominations following significant life events, including marriage, separation, divorce, the birth or death of a beneficiary, or significant changes to their financial or family circumstances.

Consequences of an Ineffective Nomination

If a BDBN is invalid, has lapsed or does not cover the whole benefit, the trustee may be required to exercise discretion under the trust deed.

This can result in:

• payment to a person the member did not intend to benefit;

• exclusion of an intended beneficiary;

• payment to the estate, potentially exposing the benefit to estate claims or liabilities;

• disputes concerning the interpretation of the trust deed;

• challenges to the trustee’s decision-making process;

• applications to remove or replace a trustee; and

• costly court proceedings.

SMSF disputes generally do not have access to the same external dispute resolution framework available to members of many Australian Prudential Regulation Authority-regulated funds. In particular, the Australian Financial Complaints Authority generally does not determine complaints concerning the management of SMSFs. Disputes may therefore require court proceedings.

Conclusion

A BDBN can be an effective estate-planning tool, but its title and the member’s signature do not establish that it is binding.

For an SMSF, effectiveness depends on the interaction between superannuation law, the fund’s trust deed, the terms of the nomination and the member’s circumstances at death. The governing documents must be reviewed carefully, and the nomination must comply with their substantive and procedural requirements.

The central question is not simply whether a member has made a BDBN. It is whether the nomination will legally bind the SMSF trustee when it is required to operate.

Part 2 of this series will consider control of an SMSF following death or incapacity, including trustee and corporate trustee succession. Part 3 will examine the taxation of superannuation death benefits, including the different tax consequences that may arise depending on the recipient and the way in which the benefit is paid.

This article was co-authored by Sofia Valentinetti (Law Clerk) and Victoria Absolon (Senior Associate).

We have a team of experts who can advise you on how to meet your estate planning goals. If you would like to discuss, please contact our office on (02) 4288 0150.