For many people, the family home and their super balance are their largest assets. A binding death benefit nomination (BDBN) can be a useful tool in deciding who will benefit from your super when you die. We summarise a recent decision of the High Court which has decisively settled the question of whether a binding death benefit nomination made by a member of an SMSF must be renewed every 3 years. We also take this opportunity to outline a number of issues related to BDBNs.
What is a Binding Death Benefit Nomination?
A BDBN is a written instruction to the trustee of a superannuation fund setting out details of how the member requires his or her death benefits to be paid. The trustee is obliged to give effect to a valid BDBN. In the absence of a valid BDBN the trustee has a discretion as to the payment of death benefits to beneficiaries.
Do BDBNs expire after 3 years?
Section 59 of the SIS Act prohibits the governing rules of a super fund other than an SMSF (for example, an APRA regulated fund such as an industry fund or a retail fund) from allowing the exercise of a discretion by a person other than the trustee. There is an exception where the governing rules allow a member, by notice given to the trustee in accordance with the SIS Regulations, to require the trustee to provide death benefits to a person or person mentioned in the notice, and the notice complies with the requirements of SIS Reg 6.17A. One of these requirements is that the BDBN will cease to have effect, unless revoked sooner, 3 years after the day it was first signed or last confirmed or amended by the member.
This requirement is the origin of the idea that a BDBN in an SMSF may only be valid for 3 years. However, SIS Regulation 6.17A does not apply to SMSFs. This view has been endorsed in a number of State court decisions and by the Australian Taxation Office in Self Managed Superannuation Funds Determination 2008/3.
The High Court decision in Hill v Zuda Pty Ltd as trustee for the Holly Superannuation Fund [2022] HCA 21 is significant because it decisively confirms at the highest judicial level the view that BDBNs in SMSFs do not necessarily expire after 3 years. The rules which govern BDBNs in an SMSF will be contained in the fund’s trust deed. In the case, Ms Hill was the only child of Alec Kumar Sodhy. Mr Sodhy had been in a de facto relationship with Ms Murray. In 2011 Mr Sodhy made a document purporting to be a binding death benefit nomination in favour of Ms Murray. Mr Sodhy died in 2016, more than three years after making the binding death benefit nomination. Ms Hill challenged the validity of the BDBN, arguing that as it had been signed more than three years prior to the deceased’s death, it had ceased to have effect. The High Court held that Mr Sodhy’s BDBN was valid, as regulation 6.17A does not apply to SMSFs.
While this clarification makes the use of BDBNs more straightforward, a member’s individual circumstances must be taken into account in deciding if a BDBN is appropriate at all.
What are the Advantages of BDBNs?
- A properly drawn BDBN provides certainty as to how the member’s death benefit will be distributed. In the absence of a BDBN, the trustee of the fund will have a discretion in allocating death benefits between the dependants of the member and perhaps the member’s estate. It is impossible to be entirely certain who will be the fund trustees or trustee directors when this decision comes to be made.
- A BDBN prepared along with the member’s will allows the member’s legal advisers to deal with their assets as a whole, and to ensure beneficiaries benefit as intended by the member.
- A BDBN can be prepared bearing in mind the tax implications of the payment of proposed death benefits, avoiding the risk that trustees might allocate death benefits without obtaining proper tax advice.
- A BDBN can be used to direct a particular SMSF asset to a named beneficiary.
- A BDBN effectively operates to dispose of assets outside the legal environment that applies to wills and estates. It is however possible for BDBNs to be affected by the ‘notional estate’ provisions in New South Wales.
What are the Disadvantages of BDBNs?
- A BDBN must comply with the requirements of the fund’s trust deed. A BDBN that is not properly drawn or does not comply with the trust deed will be open to challenge by disappointed beneficiaries.
- BDBNs cannot be treated as “set and forget” documents. Tax laws may change, a member’s circumstances may change, or the circumstances of beneficiaries may change, making an existing BDBN inappropriate. There is a need to regularly review BDBN arrangements, along with other estate planning.
- In some cases it may be that a better result would have been achieved if the SMSF trustee had the flexibility to make its own decision regarding allocation of death benefits. However, the trustee is compelled to act in accordance with a valid BDBN.
In summary, BDBNs are one tool in the larger theme of estate planning. Estate planning is certainly not a DIY activity, and we recommend that clients seek professional advice in all facets of estate planning, including legal aspects, investments, tax and superannuation.
Your Focus advisor would be pleased to take the role of coordinating advisors in all these areas, so that no issue is overlooked. Please contact your Focus advisor if you have any queries or need further information.
