Estate planning in an SMSF (Self Managed Super Fund), also referred to as an SMSF Will. It is generally good to have a Binding Death Benefit Nomination (BDBN). This is compared to a nomination that is not binding and will lapse in 3 years. Remember that benefits have to be left to natural persons.
When the Trust Deed is silent as to who the beneficiaries are and no BDBN exists, the Member benefit will pass on to the estate of the Member and will be allocated from there according to their will or testament. The disadvantage of this approach is that outside parties may lay claim to the estate, e.g. previous spouses, family members or even creditors. For this reason, it is prudent to indicate in the SMSF Deed or in the BDBN who should receive the benefit.
When a financial dependent receives the death benefit, there’s no tax to be withheld. If non-financial dependents receive the benefit, e.g. adult children, the SMSF must pay tax rate of 17% (including 15% of benefit withheld and 2% of Medicare Levy) before transferring the benefit out. You’ll find further information about taxation and financial dependents on our tax pages.
A Binding Nomination: The Trustees are bound to pay the death benefit as nominated to your nominated beneficiaries. You can nominate who gets the benefit which prevent unwanted claims against your super. A BDBN normally remains valid for 3 years.
A Non-binding Nomination: The Trustees have the discretion to follow the stated wishes of the member
Mixing family with money and estate planning makes interesting set of scenarios. There’s five commonly referred-to legal cases that’s important for SMSF’s – and it makes for very interesting reading. Click to reveal more details.
Remember, Trustees control the benefit in the SMSF. In the case of Katz v Grossman, the second trustee used her Trustee powers to have a discretion of the member benefit. In this case, a Member of the Fund died leaving two children – a daughter, who was a Trustee of the family SMSF, and a son, who was a non-Member. The father left $1M in SMSF benefits with a direction in his Will that all his SMSF assets were to be split between his two children equally – Linda and her brother. However, on his death, the remaining Trustee – his daughter – did not take into account his nomination and paid all of the deceased member’s benefits to herself.
Linda Grossman and her husband have control of the benefits as Trustees, so they were able to pay the benefit without necessarily following the non-binding nomination, which was no more than a consideration for the Trustee to take into account.
The NSW Supreme Court held that she was entitled to take this action under the Fund’s Trust Deed and the Will was ineffective. To download the Supreme Court decision, click on this link.
In Donovan v Donovan case, Ronald Donovan was the sole Member of an SMSF with a Corporate Trustee. The Fund’s Trust Deed allowed both non-binding and BDBN. The Court determined it was non-binding as Mr. Donovan had made a death benefit nomination which did not state it was binding. Therefore, a death benefit payment was made to the deceased’s second wife, effectively disentitling Ronald’s daughter from the previous marriage.
A BDBN must clearly state that it is binding on the Trustee.
A key issue in Donovan is whether the BDBN meets the requirements described in Superannuation Industry (Supervision) Regulations 1994. To download the Supreme Court decision, click on this link.
Munro and his second wife were the only Members and individual Trustees of an SMSF. Munro passed away, survived by Suzie and two daughters from his previous marriage leaving a BDBN form nominating that his Will left the residue of the estate to his two daughters (via testamentary trusts). The Court found that the BDBN was invalid as the term ‘trustee of deceased estate’ was not acceptable by the Court.
Suzie’s own daughter was appointed as the replacing trustee for Munro. The trustees announced their intention was to exercise their discretion to pay the death benefit, on the basis the BDBN was invalid, so the SMSF trustees were able to make a discretionary death benefit payment decision.
More generally, a BDBN must be clearly worded to ensure validity upon a Member’s death. To download the Supreme Court decision, click on this link.
The recent decision of Wooster v Morris describes what happened when a Trustee died and nominated his binding death benefit to his children from his previous marriage. His second wife and co-trustee tried to overthrow a BDBN. The court concluded the Trustee (second wife) failed to act impartially, favouring herself. It was a 3.5-year battle to honour the wishes of the deceased. Read a lawyer’s summary of the case in this summary, SMSF Succession Planning.
Mrs. Morris, as both individual Trustees and later as the controller of the Corporate Trustee, made decisions which favoured her own interests over those of the other Beneficiaries, despite the duty of a Trustee to act impartially and in the absence of a conflict of interest.
The outcome of Wooster v Morris highlights a key risk of SMSF estate planning. Mr. and Mrs. Morris controlled in excess of $3 million of superannuation and non-superannuation assets at the time of Mr. Morris’s death. Less than four years later, there was only a fraction of that amount remaining. The Court commented on the ‘inherent’ risk in SMSF’s and the ‘substantial conflict of interest’ that may exist.
The BDBN nomination is only a partial solution at best —it is necessary to have further control on the decision to ensure a sensible and efficient outcome. To download the Supreme Court decision, click on this link.
In Ioppolo v Conti, Francesca and Augusto Conti were the only Members and individual Trustees of an SMSF. Mrs. Conti’s BDBN had lapsed before she passed away.
As sole remaining trustee, Mr. Conti exercised the trustee’s discretion to pay the benefit to himself.
Trustees need to ensure that their BDBN is valid and up to date. To download the Supreme Court decision, click on this link.
In Hill v Zuda Pty Ltd, Hill was the only child of Alec Kumar Sodhy (Deceased) and in a relationship with Ms Murray.
In 2011 the now Deceased made a BDBN. The BDBN was in favour of Ms Murray. The deceased died in 2016. As such, the deceased died more than 3 years after the BDBN.
The Court of Appeal held that it is possible for an SMSF’s Trust Deed to be established to enable a BDBN to last for more than 3 years and this ruling is application to all Australian jurisdictions.
Trustees must ensure that the SMSF Trust Deed clearly shows an allowance for a non-lapsing BDBN. To download the Supreme Court decision click on this link.
Anthony and Margaret established an individual Trustee SMSF and Paul, their son, was appointed as a Trustee after the death of Margaret. Prior to the death in December 2021, the deceased Anthony made a BDBN to pay 50% of his death benefits to his second spouse Gayle and another 50% to his legal personal representative, who was his second son from first marriage, Mark.
The Supreme Court of Queensland has determined that this binding death benefit nomination (BDBN) was not binding on the basis that in the context of the Fund’s Deed, the Trustees (Plural) had to be notified on the (BDBN), but it was only signed by the deceased and not notified to Paul, the son who had been appointed in the deceased first wife’s place.
The Court ultimately found it was appropriate to remove the deceased’s son as the Trustee of the SMSF on the basis that his behavior was concerning and his position of conflict of interest.
To read more on this case, please click on this link.
There are effectively four ways that you as a Trustee can look after your dependents or others from your SMSF on your death:
Available for download below is a BDBN. This is also sometimes referred to as an SMSF Will. This Will will be valid until the Member decides to change it by replacing with a new BDBN.