SMSF – do you have a Binding Death Nomination

The importance of a Binding Death Nomination for members of Self-Managed Superannuation Funds (SMSF) is often underestimated.  A member of a SMSF has one method available to him or her to ensure the benefits are paid in a particular way or to a particular person on death; the making of a Binding Death Nomination.  This will only be available if the terms of the Trustee establishing the fund permit the making of a Binding Death Nomination.  Most SMSF Trust Deeds will permit this.

The importance of a Binding Nomination is sometimes underestimated even by advisers.  It can sometimes be assumed that because the Trust Deed confers the Trustee a discretion to decide how the benefit is paid that a Binding Death Nomination is less important.  This is not accurate.  Whilst most Trust Deeds will give a certain amount of discretion to the Trustee a member’s superannuation benefit on death can only be paid to someone who falls within the definition of dependent under the governing legislation or otherwise to the member’s estate (which would then be distributed in accordance with the member’s Will).

Not only is the Trustee’s discretion limited by the legislation but increasingly the exercise of the discretion is being challenged in the Courts and on occasions successfully challenged.  Most challenges arise where an individual Trustee decides to distribute the entire benefit to themselves.

Many Trust Deeds confer what purports to be an absolute discretion on the Trustee and expressly authorise conflict transactions.  Whilst those provisions are helpful a Trustee must exercise its discretion regarding payment of any death benefit; 1 in good faith; 2 upon real and genuine consideration; 3 in accordance with the purposes for which the discretion was conferred.

The Trustee is not under any obligation to state its reasons for the exercise of the discretion.

A Trustee’s exercise of discretion can be challenged if it was exercised in bad faith, arbitrarily, irresponsibly or irrelevantly.  Bad faith can be shown if the Trustee does not consider all relevant factors.  Relevant factors have been found by Courts to include:-

• The intention of the deceased;
• The relationship between the deceased and any eligible dependent;
• The financial circumstances and needs of each eligible dependent.

If competing eligible dependents are in similar financial circumstances with similar needs then it may be easier to show that the exercise of discretion was in bad faith if it involves a decision to make payment to only one of the eligible dependents to the exclusion of all others.

It may reasonably be expected that there will be an increase in the number of challenges to the exercise of discretion.  There is also now a substantial body of case law establishing that where the Trustee of the superannuation fund is also the Executor then it will be breach of the Trustee’s duty as Executor to seek to have the superannuation benefit paid to themselves rather than the estate.

A Binding Death Benefit Nomination is a simple and cost-effective way to avoid uncertainty and risk.  It is wise to take professional advice in relation to the preparation of the Binding Death Benefit Nomination as it is vital that the requirements of the Trust Deed be met strictly.  If those requirements are not met, then there is a substantial risk that the Binding Death Benefit Nomination would be found to be ineffective.

Anyone who has a SMSF and does not have a Binding Death Benefit Nomination in place would be well advised to seek advice and put in place a Binding Death Benefit Nomination.