Binding Death Beneficiary Nominations & SMSF Wills

By Daniel Butler & Claire Malone

Superannuation is a significant asset for many of our clients. Not surprisingly, they increasingly want to achieve certainty about how their benefits will be paid on death. Some may also want to plan who will be trustee of their SMSF on death. What is the best way to tie this down? There are now numerous options available to SMSF members, such as binding death benefit nominations (‘BDBNs’) and SMSF Wills. Advisers will be well positioned to assist their clients if they have a sound understanding of exactly what these options entail.

What is the difference between a BDBN and an SMSF Will?

A BDBN is a nomination made by a member during their lifetime which directs the trustee how to pay their benefits after death. If drafted correctly, the deed should allow members to make BDBNs and should also provide that the trustee is bound to follow any valid BDBN in place when the member dies. An SMSF Will is also a set of directions by the member given to the trustee, but works differently. (Note that, depending on what the member chooses, some SMSF Wills are actually death benefit nominations). However, some choose for their SMSF Will to be what is known as a death benefit rule (‘DBR’). In this case, the member’s directions vary and become ‘embedded’ into the SMSF’s deed (ie, the DBR becomes part of the SMSF’s rules).

It’s all in the implementation

Ultimately, both BDBNs and DBRs require careful implementation and neither will be 100% foolproof.

Certainty about how benefits will be paid

Achieving certainty about what will happen to death benefits is of the utmost importance. If the trustee has a right not to follow a member’s BDBN or DBR when they die because, in the trustee’s opinion, this might create cash flow problems for the SMSF, this could possibly be exploited by an aggrieved party as an excuse not to follow the deceased’s wishes.

These kinds of loopholes that create an ‘out’ for the trustee are best avoided if members want to maximise certainty. Similarly, if the trustee has a choice whether or not to accept a direction when it is given to them by the member, this could also create uncertainty. Giving a trustee a discretion not to accept a direction detracts from the objective that it should be ‘binding’ on the trustee. It may also give rise to evidentiary disputes about what happened (eg, claims that “so-and-so verbally accepted (or rejected) the direction”, etc).

A more certain approach is to compel the trustee to follow any direction that is given to them, provided of course that the BDBN or DBR is made validly (ie, in accordance with the deed and any applicable laws) and has not been revoked prior to death. Having a trustee counter-sign a direction will serve as good evidence it was in fact received by the trustee.

Amending the deed

If using a DBR (which amends the deed to ‘embed’ the member’s directions), bear in mind this could be overridden if the deed is amended. Unless there is a restriction on the variation power that prevents the DBR itself from being amended, this could be an exposure (especially if other parties can out-vote the particular member and therefore vary the deed).

An alternative might be to make a BDBN and enter into a mutual agreement (eg, between spouses) which includes an agreement not to revoke a BDBN.

Succession to the trustee role

Some DBRs also seek to set up trustee succession by providing that, eg, on the member’s death their Executor will become trustee of the SMSF. This is a good idea but the implementation is the key. Firstly, a person cannot become a trustee of a fund without consenting in writing, so this cannot happen automatically. For a corporate trustee, a person also needs to be appointed as a director in accordance with the constitution and of course there are ASIC/corporations law requirements to comply with. If the trustee has not been validly appointed, its decisions (including about payment of benefits) could be void.

Further, if the deceased’s Executors are two or more persons, what are the implications for voting power under the SMSF deed or constitution? Unfortunately, many simply give all trustees equal voting power. This means the deceased’s Executors could out-vote everyone else, even if the deceased had a small account balance! Thus, the SMSF’s deed (or company’s constitution) should make provision for this, eg, an adjustment mechanism if multiple executors stand in for the one person.

The latest on BDBNs

When deciding what path to take, advisers should ensure they are up-to-date with the latest on BDBNs. For example, we now have ATO confirmation that BDBNs can last indefinitely for SMSF members (provided the deed allows indefinite BDBNs): see SMSFD 2008/3. A BDBN is also able to specify the form of benefits (ie, whether as pension or lump sum), provided the deed expressly gives this power.

Daniel Butler and Claire Malone are lawyers with DBA Lawyers Pty Ltd.