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Four uses for a binding death benefit nomination

Death benefit

Self-managed super funds can make estate planning difficult, but a tailored binding death benefit nomination could be a “magic bullet”, an estate planner has said.

The special counsel, superannuation and estate planning at Townsends Business Lawyers, Brian Hor has said a binding death benefit nomination (BDBN) can be useful for SMSFs dealing with modern estate planning issues.

He explained: “One common condition is to impose a “cascading” succession of nominees in case the primary nominee fails to survive the fund member or fails to remain an eligible recipient of the death benefit.

“Having successive nominations ensures that the member’s superannuation death benefit does not become subject to the discretion of the fund trustee and potentially wind up in the hands of someone that the member would not wish to benefit.”


However, he noted that the capacity for retail or public offer super funds to accommodate tailored BDBNs can be “extremely limited”, and said that this is where tailored BDBNs for SMSFs can shine.

“Importantly, the SMSF trust deed must specifically provide for making a BDBN with whatever conditions necessary for the member’s estate planning strategy.

“The Courts strictly interpret whether a BDBN has been correctly drafted under the terms of the particular trust deed.”

Further, he said that nominees under tailored BDBNs have to be SIS dependants, like a member’s spouse.

If they’re not, dependants are only able to benefit from the member’s death benefits through the estate.

With this in mind, he highlighted four estate planning strategies “where a tailored BDBN can play a starring role”:

1.       “Dealing with excess Transfer Balance Cap (“TBC”) issues”

He said that if a member and their spouse are retired and have pension balances of $1.2 million each and they each gave their balance to the other as a pension in the case of their death, then the resulting $2.4 million in super would exceed the $1.6 million balance cap.

As such, the excess would attract additional tax.

“The solution is for each member to make a tailored BDBN to use up the unused balance of the relevant TBC, and then to give the rest of the death benefit to the survivor,” he said.

“Then the survivor can receive the maximum tax-free pension up to their TBC as indexed, and the balance of their deceased spouse’s superannuation as a tax-free lump sum.”

2.       “Dealing with uncertain survivor-ship issues”

In the second situation, a member’s desire to ensure the ongoing comfort of their surviving spouse clashes with the possibility of their spouse receiving a significant inheritance from their parent.

“In this event, the member would rather that their superannuation balance be distributed to their children in equal shares,” the special counsel said.

“A member could make a BDBN which says that their death benefit is to support a pension payable to their spouse until the death of the spouse’s parent.”

Then, when their spouse’s parent dies and the spouse receives an inheritance that matches or surpasses a certain value, the death benefit is rolled over and divided between the member’s children.

3.       “Keeping your superannuation away from your estate”

“If a member only wants to benefit persons who are their SIS dependants and also minimise the chance that their death benefits might go to their personal creditors, then making a “SMSF Will” style of tailored BDBN can be a very useful strategy for a number of reasons,” Mr Hor said.

These can include avoiding claims from either personal or business creditors, or if their personal estate is small then a BDBN can be used to avoid having to probate their will.

Further, he said a BDBN can help negate disputes about the estate or will after the member dies and in states excluding NSW, a BDBN can be use to minimise the value of the personal estate that can be subject to family provision claims.

4.       “Maximise tax efficiencies for both SIS and non-SIS dependants”

According to Mr Hor, a tailored BDBN can also ensure that: “A member’s spouse receives a potentially tax-free pension for the rest of their life,” and that: “On the death of the spouse, the member’s children then share the capital equally between them (potentially tax may be payable).”

Continuing, he said a BDBN can maximise tax efficiency for descendants like grandchildren by listing them as discretionary beneficiaries of a testamentary discretionary trust.

Or: “Any of those persons who are minors will be treated as adults for tax purposes and have access to the full tax-free threshold, rather than face penalty rates otherwise payable by minors.”

Four uses for a binding death benefit nomination
Death benefit
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