Everybody has a superannuation fund that they intend to rely on once they’ve retired. Money is dedicated to these funds to assist us with living comfortably after retirement. However, what most people do not account for is that there is often a substantial sum remaining in these funds after they pass away. Unlike your other assets, the remaining sum is not automatically dealt with by the deceased person’s estate. Rather, a trustee is appointed and, in accordance with the instruments of the super fund, they distribute the remaining funds (the Benefits) to the nominated person(s).
It is desirable for the person making the nomination (i.e. the member) to be the one making the ultimate decision as to who the Benefits go to. Through a Binding Death Benefit Nomination (BDBN) the member can ‘bind’ the future trustee to the member’s decision.
A BDBN is incredibly important. Without one, the appointed trustee of the super fund must rely on their own discretion and are not bound by the intention of the deceased member. For example, this could result in a trustee, who is unfamiliar with the particular family circumstances, distributing the Benefits to the member’s ex-partner despite this being contrary to the member’s actual post-death desires.
The trustee may even attempt to distribute the Benefits to themselves, as seen in the case of Wareham v Marsella where a father sued his daughter after she, as trustee of her mother’s super fund, decided to distribute all of the Benefits to herself and her husband. This case demonstrates how leaving the decision to the trustee’s discretion can result in long, expensive and strenuous disputes between family members.
The ‘Lapsing’ Nomination
Starkly, the same problems can occur even for a valid BDBN, if it has expired/lapsed. For example, retail super funds must, pursuant to s 59 of the Superannuation Industry (Supervision) Act 1993 (Cth) and Reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994, require BDBNs to be renewed every three years, or they expire.
Upon expiry, it is up to the benefactor/nominee of the super fund to re-apply for the Nomination. The expiring of nominations may be desirable for some members as it forces them to reconsider their nominations and update same according to their contemporaneous circumstances.
It is, however, unlikely that a super fund will give notice of such expiry, particularly in the case of large retail super funds. If a BDBN has expired, the decision is left to the trustee’s discretion in the same manner as above, invoking the same problems. In the 2016 case of Retail Superannuation Pty Ltd v Pain, Justice Blue suggested that the provisions that govern industry super funds should be reviewed and reformed by Parliament. He indicated that there was a strong desire by members to be given the option to make non-lapsing Nominations.
The ‘Non-Lapsing’ Nomination
A recent popular trend is for super funds to make their BDBNs non-lapsing. Non-lapsing BDBNs absolve the need for members to update their nominations every three years. They will remain valid indefinitely, and remove the member’s concerns about how their money will be dealt with after they pass away. In this way, a non-lapsing BDBN acts like a Will.
However, while non-lapsing BDBNs are welcomed in many circumstances, they should not be used without appropriate consideration. For example, members will have to remember to change their nomination themselves if their circumstances change, and failing to do so will not leave any discretion for the trustee to make a different decision.
For diligent members, non-lapsing nominations can be changed at any time, and thus provide the benefit of easy adaption to changing circumstances.
Non-Lapsing BDBNs and Self-Managed Super Funds
The judgment of Munro v Munro suggested that, unless explicitly stated within the trust deed, Self-Managed Super Funds (SMSFs) may be exempt from the above superannuation legislation. It has been suggested on a number of occasions that a likely extension of this is, unless the trust deed provides it, that the three year limit does not apply for BDBNs of SMSFs.
However, this does not automatically mean that all SMSFs are exempt from the lapsing or non-lapsing distinction. Rather, a more conservative approach infers that members of SMSFs need to be vigilant by knowing and understanding the terms of their trust deeds so as to recognise the category of BDBN that they fall under, and to ensure that it is properly drafted to reflect their circumstances. This is demonstrated in Munro v Munro, where the Court determined that even though the Reg 6.17A did not apply to Mr Munro’s SMSF, and thus the BDBN should still be operational, the Court nonetheless struck down the Nomination on the basis of a poorly drafted trust deed.
Check the terms of your trust deed carefully. Where there are lapsing BDBN’s, make sure you are aware of the expiry dates and promptly act to prevent expiry and update it accordingly.
If you have a non-lapsing BDBN, or are part of a SMSF and likely fall in the non-lapsing category, you may not have to worry about any expiry date. It is, however, important to know and understand the terms of your own trust deed. It is equally important to remember your own nominations, so you can change them if and when your circumstances change.
If you are looking to change super funds, set up a SMSF, or are generally considering Estate Planning, it is a good idea to keep in mind the recent trend of super funds moving towards non-lapsing BDBN’s and the positive attributes that they offer.
If you would like to review your trust deed, or have concerns regarding your own Binding Death Benefit Nomination, contact Gavin Parsons of Gavin Parsons and Associates by email at firstname.lastname@example.org or by phone on (02) 9262 4471.