A binding death benefit nomination (BDBN) is a written instruction given by a member of a superannuation fund, directing the trustee to pay the member’s superannuation benefits to one or more of their ‘dependants’ and/or legal personal representative after their death.
Provided that the BDBN complies with the relevant fund’s requirements and is valid at the time of the member’s death, the trustee must comply with the direction in the nomination and pay the death benefit in accordance with that direction. Each super fund, including self managed super funds (SMSFs) will have their own requirements for making a valid BDBN, but generally, a nomination must:
- Clearly outline the recipients of the death benefit and the proportion or amount of benefit to be paid to them;
- Be signed by the member;
- In many cases, witnessed by two independent witnesses; and
- Provided to, or accepted by, the trustee of the fund.
Let’s look at why you might choose to have a BDBN and the issues that could arise if you do.
Reasons for completing a BDBN
There are a number of reasons for why you may have, or be advised to have, a BDBN in place. For example:
- A BDBN puts you in control and provides you with certainty that your superannuation death benefits will be distributed in the way you have outlined in the nomination. It prevents the trustee (who, in the case of externally managed funds, may be one or more individuals representing the trustee who have no connection to you) from exercising discretion over the payment of your benefits, which may otherwise not align with your intentions.
You may require certainty because:
- You have a challenge risk to your estate and want to avoid death benefits being paid to your estate to be distributed in accordance with your Will. Note that under current law in Victoria, superannuation is not an asset able to be challenged unless it forms part of your estate, but this is not the case in all Australian jurisdictions;
- Alternatively, you want to direct your superannuation to your estate because:
- Your Will includes provisions and structures which are intended to provide your beneficiaries with increased asset protection and permitted tax concessions (eg, testamentary trusts or a superannuation death benefits testamentary trust); or
- Your priority is to restrict access to capital for certain beneficiaries which would not be possible if they received the benefits outright, even if this may not be the most tax effective way of distributing the death benefits; or
- You have vulnerable beneficiaries or young children who you wish to benefit on death, and want to avoid such beneficiaries obtaining control of the death benefits via the trustee exercising its discretion to pay death benefits directly to them;
- A valid BDBN may speed up the death benefit payment process. Where there is no BDBN in place, trustees of superannuation funds will generally need to investigate and gather additional information to enable them to consider and determine the recipient of the benefits. This can result in payments being delayed and held up for months or years after the death of the member; and
- The circumstances in which a BDBN can be challenged are generally limited to the validity of the document, eg, a challenge based on the decision-making ability of the member to make the BDBN, or the formalities of the document. A valid BDBN cannot be challenged just because an aggrieved or disgruntled beneficiary believes it to be unfair or unreasonable.
Drawbacks of a BDBN
Whilst a BDBN provides you with certainty and allows you to direct how your superannuation entitlements are to be dealt with on death without the trustee involved in the decision, a BDBN can potentially have the following drawbacks:
- A BDBN should never be completed in isolation to addressing your overall estate planning, and without understanding the tax implications of directing death benefits to a particular person or in a particular manner. For most people, superannuation is likely to be only one part of their assets or structure and a BDBN may be inconsistent with other documents or planning strategies which may be advised by a lawyer;
- In many circumstances, there is a loss of flexibility as the trustee cannot consider the beneficiaries, circumstances or laws at the time of your death. As death may be some time after the completion of a BDBN, it is advisable to regularly review your nomination, and, if appropriate, update or renew the nomination, notwithstanding that it would not otherwise expire;
- The BDBN may expire after a period of time, or upon the occurrence of a specified event, without your knowledge. It is important to familiarise yourself with the rules of the fund and the occasions where a binding nomination may become ineffective or invalid. For example, the deed for the fund may specify that a BDBN:
- Lapses after 3 years, even if in the case of SMSFs, BDBNs can be non-lapsing; or
- Ceases on the occurrence of certain life events such as marriage, separation or divorce, or where the person nominated in the BDBN has predeceased the member;
- When you commence a pension, you may nominate a reversionary beneficiary to receive the balance of your pension on your death as part of the terms of the pension. As such, when you die, there may be two documents in place – a reversionary nomination and a BDBN. The governing rules of the fund may specify that for benefits in pension phase, a reversionary nomination takes precedence over a BDBN. In this case, the BDBN will be ineffective for the benefits subject to the reversionary nomination but may still remain valid for any benefits continued to be held in the accumulation phase. Problems can potentially arise if a deed is silent on which document or nomination prevails.
A discussion on death benefit payment strategy should always be considered as part of an estate plan and never in isolation. Whilst the overwhelming benefit of a BDBN is certainty and control, it is important to regularly review your BDBN to ensure that it aligns with your current wishes and objectives.
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For advice or guidance regarding Estate Planning and Family Law including BDBN, please do not hesitate to contact us.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to your organisation.