Superannuation binding death benefit nominations and other post-death directives

As explained in bulletin No 1, a binding death benefit nomination (BDBN) exists solely in relation to superannuation and acts in the form of a “superannuation will” in the sense that it mandates what happens to your superannuation account balance after death.

We foreshadowed that we would consider the following issues.

What is the difference between a binding death benefit nomination and non-binding death benefit nomination?

A binding death benefit nomination if validly made and maintained, obliges the trustee of the superannuation fund to comply with it.  A non-binding death benefit nomination only has guidance effect.

What considerations bear on whether you would make a nomination which is binding or non-binding?

Putting aside special circumstances, the main consideration is your desire to have control of the destination of the post-death superannuation.

Having said that, it is legitimate to consider that the decision that you make about the destination (which is written into the binding death benefit nomination) is a decision you made by reference to the circumstances prevailing when you made it.  Since a non-binding death benefit nomination allows the trustee of the superannuation fund to do no more than take it into account in coming to a decision, that trustee faced with a non- binding death benefit nomination can take account of circumstances as they exist at the time of your death (which means change in circumstances since when you made the nomination).

There is an administrative inconvenience associated with a non- binding death benefit nomination (or no nomination at all).  The trustee of the superannuation fund will engage in a fact-finding exercise to determine to whom the death benefit is to be paid.  This can take many months.  All potential parties must complete paperwork to provide the trustee with the required information.  This fact-finding exercise is known as claim staking.

Claim staking does not occur in the case of a valid binding death benefit nomination.  There is no “on the merits” decision for the trustee of the superannuation fund to make, because the recipient of the death benefit is pre-destined by the terms of the nomination.

You can validly nominate your estate to receive the death benefit.  Technically, in the nomination, you use words to show that “100% goes to my legal personal representative”.  By doing this, the money from the death benefit becomes an estate asset and can be given, by the will, to recipients who cannot directly receive a superannuation death benefit under Commonwealth superannuation law.  These are means by which you could give superannuation money to relatives outside a spouse or children, to friends and other people who are neither in an interdependent relationship with you or who are not financially dependant on you, and to charities.   One consequence of this is that your executors (assuming you have made a will) would very likely be required to obtain probate of your will.  The reason for this is that probate is the legal means by which they establish their identity as your legal personal representatives.

How does any form of nomination work in conjunction with your will?

The nomination works in conjunction with your will in at least 2 ways:

1. If the nomination directs or results in the death benefit being paid to your estate, it becomes part of your estate.  It is then distributed in accordance with the provisions of your will.
2. If the nomination directs or results in the death benefit being paid directly to some person (such as a spouse, child, financial dependant or person in an interdependent relationship), the payment takes place “outside the estate”.  However, there may be a provision in the will requiring the executors to adjust the distribution to take account of any benefit which a person receives because of death, but not by way of the provisions of the will.

What happens to your superannuation death benefit if you do not make any nomination?

The trustees of the superannuation fund engage in the claim staking process and decide.

What income tax consequences are associated with any form of death benefit nomination?

Recipients are divided into those who can and those who cannot receive such a benefit tax free.  The tax consequences first depend on the category that applies to the recipients.

A second factor considers the breakdown of the superannuation death benefit into components called the tax free and the taxed components.  (There is another category which concerns those death benefits which have been increased by a payout of life insurance, but they are beyond the scope of this Bulletin).

Tax free recipients are:

• any legally recognised spouse including a former spouse;
• children under 18;
• a person who was at death in an interdependent relationship with you;
• a person who was proven to be financially dependent on you at death.

Anyone in the above categories can receive a lump sum benefit from your estate tax free.  It does not matter what the tax free and taxed components are.  It also does not matter whether the death benefit payment is made to the recipient directly (outside the estate) or by a distribution in accordance with a provision in the will.

Non-tax-free recipients are anyone outside those categories.  If the death benefit is paid directly to such a recipient, there is tax of a maximum of 17% (15% plus Medicare) on the taxed component (the tax-free component is free of tax irrespective of the character of the recipient).  If the death benefit is paid to such a recipient through the distribution of the estate, there is tax of a maximum of 15% (no Medicare) on the taxed component.

The “maximum” element in the expression of the tax rate is achieved by an offset mechanism which ensures that no more than the maximum rate is levied on the taxed component.

Who are eligible recipients?

Eligible recipients means those who are treated by superannuation law as being capable of receiving a death benefit in their own right.  The categories resemble but are not the same as the categories of tax-free recipients.

They are:

• any legally recognised spouse;
• children of any age;
• a person who was at death in an interdependent relationship with you;
• one other important eligible recipient (though not an individual) is the estate of the deceased superannuation member.  More precisely, it is the executors (technically called the legal personal representatives).

To simplify when you are considering a particular individual:

• consider the categories of eligible recipients.  If the individual is within one of those categories the person is able to receive a benefit in his or her own right;
• to determine what the tax consequences will be, consider the categories of tax-free recipients.  If the individual is within one of those categories as well as being within a category of eligible recipient, the person can receive a benefit in his or her own right, and tax free.
• if the person is within a category of eligible recipients but not within category of tax-free recipients, the person can receive a benefit in his or her own right but it will not be tax-free.

As you can see, some people who are important depending on one’s individual circumstances, such as grandchildren, siblings, nephews, nieces, or friends, do not feature in any category.

• How do they get a superannuation benefit?
• They can receive it through the estate.  The superannuation fund member (the deceased) had to have taken steps to direct the superannuation death benefit into the estate and must then have inserted a clause in the will giving or sharing to include that grandchild, sibling, nephew, niece, or friend.

How do you make a valid death benefit nomination?

You must strictly comply with the requirements set forth in the constituent documents for the relevant superannuation fund.  These requirements relate not only to how the nomination is worded, but how it is lodged or otherwise dealt with after it is made.

In the case of a self-managed fund, this involves studying the trust deed.

In the case of a retail or industry fund, it is usually sufficient to rely on the form provided by the fund or as supplied on the fund website.

Some such nominations are everlasting – they do not expire.  Others only have a limited life – usually 3 years.  For a limited life nomination, it is as well to mark your own bring up to renew the nomination prior to the expiration of that time.

It is becoming increasingly accepted that you can authorise your attorneys under your enduring power of attorney to renew, should the renewal date fall after you have lost capacity.

How does the role of the death benefit nomination vary as between different types of superannuation funds?

In practical terms, there can be more issues with self-managed superannuation funds, because the persons running the fund after a member’s death are invariably “connected” to the deceased.  Those persons sometimes see for the first time after death, a nomination which can cause them to feel a conflict of interest between obligations as trustees of the fund, and self-interest.  In other words, those persons may have felt that the nomination could easily have benefitted them.  They may devote some energy to seeing whether the nomination can be disregarded in expectation that there may be a better result for them.

This conflict of interest does not arise in retail or industry funds.  The trustees are unconnected to the deceased and are therefore objective.

Is a death benefit nomination the only way of controlling the post-death destination of your superannuation account balance?

It is not the only control mechanism.

Others are:

• a provision in the fund documents which effectively converts what would have been a nomination to a sub-rule of the fund; or
• for a member who is already drawing a pension, a device known as a reversionary pension.  This provides that automatically on the death of the first member, the pension carries over to another – invariably a spouse.  This device applies only to pension interests; or
• any other arrangement which amounts to an agreement between the member and the fund.
• Further examination of such devices is outside the scope of this bulletin.

Article by:

Gary Lanham
Special Counsel
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