+ Binding Death Benefit Nominations

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Can a BDBN specify how a death benefit is paid ?

A BDBN is a nomination made by a member of a SMSF that is given to the trustee of the SMSF. Receipt of the BDBN binds the trustee to pay the member's benefits upon death as specified in the BDBN. This is seen of great benefit where clients are concerned about their spendthrift spouses. Such clients often seek to ensure that their super death benefits will be paid out as a 'drip feed' pension. Subject to the SMSF's governing rules, this can be done.

Section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (Cth) ('SISA') deals with the issue (although some argue inadequately). Moreover, the Commissioner of Taxation has released a determination stating that SMSF's may have BDBNs that last indefinitely (SMSFD 2008/3).

However, there are trips and traps for the unwary.

Firstly, the most popular type of SMSF pension (including death benefit pensions) is an account-based pension. Account-based pensions can generally be commuted (i.e. exchanged for a lump sum) at any time. Furthermore, there is generally no limit to the size of an account-based pension's annual payment. Some seek to address these drawbacks by having the BDBN also add extra rules as to how pensions are paid (eg with a cap of maximum pension payments, without the ability to be commuted etc).

In order to achieve this, the SMSF's governing rules would need to specify limitations and in so doing ensure that there is no conflict with the SISA regulations. Moreover, in order for these limitations to be irrevocable, the SMSF's governing rules would need to contain special provisions to preclude the surviving spouse from opting out. This type of strategy has yet to be tested in court.

Secondly, remember that the members of the SMSF must also be trustees (or directors of the trustee company). This means that surviving members can also write the SMSF's cheques!

To overcome the first risk, some advocate inserting provisions directly in the SMSF's governing rules. However, this does little to address the second concern.

A third alternative is for the client to simply accept these risks. The client can merely accept that by using the super environment, tax efficiency is being achieved but this comes at the cost of being able to fully control super benefits from the grave.

A fourth option is to make a BDBN specifying that upon death, the super death benefits be paid not to the spouse, but rather to the deceased's estate. The terms of the deceased's estate (i.e. the will) can then specify that the surviving receive an annuity of $x p.a. as increased for inflation each year.

Naturally, an independent third party would be the executor of the estate and the trustee of any trust that arises under it. However, this fourth technique opens the door to the risk that the estate might be challenged.

Therefore, the fifth alternative should be considered. This is to withdraw benefits from the SMSF during the lifetime of the soon-to-be-deceased and then put the benefits in an inter vivos trust (e.g. a family discretionary trust). The governing rules of the inter vivos trust can specify that the surviving spouse receive $x p.a. as increased for inflation each year and an independent third party would be the trustee. For completeness, note that in New South Wales the "notional estate" provisions of applicable legislation can mean that this technique still leaves the estate open to a challenge.

Each of options 4 and 5 involve a loss of tax efficiency. Please call us should you require us to make any of the above changes for you.

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