When it comes to the requirements for binding death benefit nominations (BDBNs) in the context of self managed superannuation funds (SMSFs), the provisions of the trust deed are paramount. Many advisors don't realise that the provisions of the Superannuation Industry (Supervision) Act 1993 have no bearing on the process for making binding death benefit nominations and that all of the answers lie in the trust deed itself.
Common errors or issues that can affect the validity of BDBNs are:
- The process specified in the trust deed is not correctly followed, for example:
- An approved form of BDBN (often annexed to a Schedule in the trust deed) is not adopted
- The Trustee's approval or acknowledgement is required but not obtained or no evidence of such can be shown
- A requirement to provide certain information to members before they are able to make a BDBN is not followed
- The BDBN nominates a beneficiary who is not an eligible beneficiary, that is, the beneficiary is not within the prescribed group of eligible recipients of superannuation death benefits at law, for example, the beneficiary is a spouse, child, financial dependent, person in an interdependency relationship or legal representative of the deceased member.
- The entirety of member benefits are not dealt with in the BDBN. This issue may occur where the trust deed only allows a BDBN to deal with benefits in an accumulation account and so amounts in a pension account may not be covered by the terms of a BDBN.
- There may be a Reversionary Pension in place with an inconsistent BDBN. So which document takes priority? A properly set up reversion will be automatic, meaning that there will be no death benefit for a trustee to make a decision about, and a well drafted trust deed will prescribe whether a Reversionary Pension or BDBN will come up trumps. However, often deeds are silent or ambiguous on this issue and so uncertainties arise.
So what can advisors do to minimise the risk of BDBNS being invalid? Read the deed for starters! Given that the majority of challenges come from basic non-compliances with the procedures set out in the trust deed means that a lot of members, and often their advisors, are not reading the deed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.