Newsletter No. 12, December 2014

Binding Death Benefit Nominations – to have or not to have?

In October this year, I wrote an article for Cuffelinks on the topic of Binding Death Benefit Nominations (BDBN).  I have attached the link to the article here in case you want to refer to it. In our SMSF Success Secrets seminar held in Sydney in November this year, Noel Whittaker mentioned to seminar participants how sometimes having a BDBN can work against you.

Let me explain.

Let’s assume your SMSF is a two member superannuation fund where you and your spouse are the members and trustees of your SMSF.  You have three adult children.  You and your spouse both have BDBNs with your SMSF stating that – in the event either of you die the deceased member’s superannuation is to be distributed equally between the spouse and the three adult children via the executor of your estate.

So what happens in the event that one of you dies under these circumstances? The surviving member must follow the requirements in your SMSF’s Trust Deed as to how the superannuation will be paid and who it will be paid to.  If the trust deed allows for a BDBN, then the deceased’s superannuation will be distributed equally between the spouse and the three adult children via the executor of the estate.  However, under the taxation law, your spouse is classified as a dependant and your children are classified as non-dependants.  Therefore, the lump sum death benefit paid to the spouse will all be tax free, whereas, the lump sum death benefits paid to the adult children via the executor of the estate will attract 15% tax payable on the taxable component of the lump sum death benefit.

Had there been no BDBN lodged with your SMSF, the deceased’s superannuation would be paid to the surviving member (i.e. the spouse) entirely tax free.  The spouse could then pass the money onto the adult children in accordance with their wishes expressed in their will.  The adult children would not pay any tax on the money being passed onto them.  This could mean tax savings of $150,000 if the deceased’s member’s superannuation account consists of $1 million taxable component.

Now, this is all fine if the family operates harmoniously.  But what if there is a falling out between the surviving spouse and one of the adult children, and the spouse decides not to distribute any of the superannuation to this family member and ignores the deceased’s will. Well, if that happens, there is nothing anyone can do about it.  The surviving member has acted in accordance with the SMSF’s trust deed and paid themselves the deceased’s superannuation.  It is up to them as to how they use this money.

This scenario is exactly what I described in my Cuffelinks’ article.  The court case, Ioppolo & Hesford v Conti, was where there was no BDBN lodged with the SMSF and the surviving member decided to pay himself his estranged wife’s superannuation, instead of following the direction in the wife’s will which expressed her superannuation should be distributed to her four children.

In the court case, Wooster and Morris, although a BDBN existed stating that the deceased’s superannuation was to be distributed to Mr Morris’s daughters from his first marriage, the surviving member (i.e. his second wife) decided to ignore the BDBN and paid herself the deceased’s superannuation.  The daughters took action and won.

You will need to decide for yourself what the best option is – have a BDBN or not have one!  Just remember, family members may not always follow your wishes in the event of your death. Money can do funny things to people!

Disclaimer

Monica Rule worked for the ATO for 28 years and is a Self-Managed Superannuation Specialist Advisor. Monica is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English”. Her advice is general in nature and you should seek advice that relates to your specific circumstances before making any decisions. www.monicarule.com.au