When death doesn't have to do us part
One of the features of a self-managed super fund (SMSF) that is often touted is its flexibility. This exists both in accumulation and retirement phase, and arises in a number of contexts, such as investment choice and pooling of balances. It’s also important to remember that this flexibility also exists when it comes to estate planning, or more importantly, death benefit planning.
Death benefit planning in a superannuation context relates to the discussion of who you want your remaining super benefits paid to in the event of your death. In a standard superannuation environment, death benefits are normally dealt with in one of three ways depending on the type of nomination that exists. These same three options exist in the SMSF environment.
3 standard beneficiary options of super still apply
First, a binding death benefit nomination is in place. If a binding nomination is in place, it will set out who the death benefit is to be paid to, and how much of the balance they are to receive. If the binding nomination is valid (for example, the beneficiaries named are eligible under super law to be paid a benefit), it must be followed.
Second, a discretionary death benefit nomination is in place. Like a binding nomination, it will indicate who the death benefit is to be paid to, and how much. The difference is that the trustee of the fund, which in the case of an SMSF are any remaining trustees plus your legal personal representative (often the executor of your estate), are not bound to follow the nomination. Whilst in most situations the wishes left in a discretionary nomination are followed, trustees often need to take more care as inappropriate allocations can be challenged.
Third, there is no nomination in place. In these circumstances the remaining trustees have full discretion as to who is paid and how much, provided the distributions are made in accordance with super law. As the deceased’s will is often seen as a guide to where payments should be made, a number of trustees may be inclined to take the “easy” way out and pay the death benefit to the estate, and therefore allow the executor to handle the allocation. Of course, this means your super suddenly becomes an estate asset and may be subject to potential challenge from beneficiaries.
Of these three options, a binding nomination appears to be the safest, and is in most cases. But there are issues to be aware of.
Beware of the 3 year expiry…
In most superannuation funds, a binding nomination is only valid for a maximum of three years. Unless it is renewed at least every three years, it ceases to be binding for the trustees. Whilst it may then give an indication of where you wanted the benefits to go, the trustees aren’t bound to follow it and even if they did, they could be challenged by other possible superannuation beneficiaries.
SMSF has an alternative solution
This is where a SMSF can offer some advantages. With a properly drafted Trust Deed, it is possible to establish a non-lapsing binding nomination within your SMSF. This means that you can forgo the three year renewal for it to be binding upon your death. While there is no requirement for its renewal, this should be regularly revisited, just as you would, your Will.
As an example, if your original intent was for your benefits to be paid to your spouse and you outlived your spouse, your otherwise binding (and non-lapsing nomination) will be invalid as your benefit can no longer be paid as intended.
Beyond this, it is also possible to deal with your death benefits in another way. This particularly arises when you move to retirement and commence drawing a pension from your SMSF. Whilst your death benefit nominations can still deal to your wishes, you could gain additional certainty by commencing pensions with binding reversionary nominations.
In its strictest sense, a true binding reversionary nomination will mean that if you were to pass away before your pension account was exhausted, the pension will continue to be paid to your nominated beneficiary after your death. This means the beneficiary doesn’t have a choice about how to receive the benefit – it will continue to be paid in the form of a pension. A discretionary reversionary nomination on the other hand may indicate and confirm who the benefit will be paid to, but not be binding on the “how” – that is, the beneficiary could choose between a lump sum or a pension.
This ability to put in place a valid binding reversionary nomination may increase in importance in the future as a result of the Government’s 2016 Budget announcements placing a cap on the amount that can be placed into a pension. If a valid binding reversionary nomination is in place, your beneficiary should be able to continue to receive your pension without it impacting on how much of their own super benefits can be transferred to a pension in the future. If the beneficiary had a choice however, and chose to continue to receive a pension, then it may be assessed against their cap.
Do the ground work now for a well planned retirement
Whilst the main aim of super is to save for your own retirement and then, hopefully, be able to spend those savings in retirement, it’s vitally important to plan and be aware of what could happen if you were to pass away earlier than expected. A well-crafted SMSF Trust Deed can give you added flexibility and greater certainty. Given the complex nature of super and estate planning though, you would be best served by making sure you get the assistance of experienced advisers to provide yourself and your family peace of mind.