Provided their Trust Deed permits, SMSF members can construct Binding Death Benefit Nominations in a similar fashion to a Will, enabling complex estate planning strategies for their SMSF.
Along with Reversionary Pension Nominations, Binding Death Benefit Nominations (BDBNs) are the most common means by which a member will direct the distribution of their SMSF death benefits.
Whilst many deeds enable the completion of a basic, Pro-forma BDBN, many strategically provisioned deeds will enable complex estate planning strategies to be implemented via BDBNs.
In this article, we will examine the different kinds of BDBNs available to members of SMSFs, and consider how they suit specific client needs.
Emphasis must be placed on the fact that it is essential the trust deed for the Fund enables the type of BDBN outlined, in order for the member to effectively complete one appropriate to their requirements.
The Basic BDBN
The basic BDBN, commonly found as the default document in some SMSF deeds and often the only option available for members of public offer funds, provides little opportunity for Estate Planning strategies other than to nominate one or more individuals to receive a benefit.
Such a BDBN may expire after three years if no action is taken to continue it.
Potentially, if the member loses capacity after completing a lapsing BDBN, the BDBN may have no more effect than a mere statement of wishes.
The Basic BDBNs generally do not cater for the situation where a beneficiary predeceases the member, nor does it enable the Member to leave specific assets¹ to a beneficiary.
The Basic BDBN, therefore, is very limiting from a planning perspective.
The Standard BDBN
The Standard BDBNs are more advanced than the basic, enabling not only for the member to nominate one or more beneficiaries to receive their death benefits, but also catering for the situation where a nominated beneficiary predeceases the member.
The Complex BDBN
The Complex BDBN provides for a greater range of eventualities, as well as different layers of beneficiaries.
A complex BDBN can cater for:
- the provision of benefits to multiple beneficiaries;
- the allocation of benefits to an alternate beneficiary, if one or more beneficiaries predecease the member;
- and, in some instances¹, the allocation of specific assets to beneficiaries.
Which is best?
Which BDBN best suits your client will depend on their individual circumstances. For some, the Basic BDBN may be adequate – for others, a Complex BDBN may be required.
So, what can a Complex BDBN provide for?
The following are some examples of how Complex BDBNs can enable advanced estate planning strategies for members of an SMSF.
Example # 1 – Eventualities
Bethany and Oliver have been married for 30 years. Bethany has a child, Darren, from a prior relationship.
Although Darren is a stepson of Oliver, Oliver considers him to be his son, but there is a possibility that Darren may not be a SIS dependant of Oliver at the time of Oliver’s death.
If Bethany predeceases Oliver, Darren may need to prove financial dependency to be deemed a dependant of Oliver.
If he is not a SIS dependant at that time, a BDBN in favour of Darren will be invalid.
So as to cover the various eventualities, Oliver prepares a BDBN in which he directs the benefits in the event of his death to pass:
- firstly to Bethany;
- secondly to Darren, if Bethany predeceases Oliver, with a condition that the benefit is only to be passed to Darren if he is a SIS dependent at the time; and
- thirdly to Oliver’s Legal Personal Representative (LPR) to be held for his estate.
By constructing his BDBN in such a way, Oliver has covered a range of possibilities, such as:
- if Bethany survives Oliver, the benefits will pass to her;
- if Bethany predeceases Oliver, the benefits:
- will pass to Darren if he is a SIS dependant of Oliver at that time; or
- will be dealt with under the third level if Darren is not a SIS dependant; and
- in that event, the benefits will pass to Oliver’s LPR for his estate and then, presumably, to Darren in accordance with the instructions contained in Oliver’s Will.
Example # 2 – Multiple Generations
Elizabeth and Wayne have an SMSF and, as a result of the Transfer Balance Cap limitations, each has an Account Based Pension and an accumulation account.
When attending to their estate planning, Elizabeth and Wayne decide on how they want their superannuation to pass on their death.
With the assistance of their adviser, Elizabeth and Wayne have decided that they will add a Reversionary Pension Nomination2 to their Account Based Pensions, nominating the other to receive their pension.
They do that with the understanding that the Transfer Balance Caps may require at least some of the reversionary pension to be commuted and paid out of the fund as a lump sum.
As each also has an accumulation account, which they realise will not be covered by a reversionary pension nomination, they decide to each have a BDBN prepared.
As part of their estate planning requirements, Elizabeth and Wayne wish to leave their accumulation benefits to each other in the first instance, then should one die before the other, for their benefits to be distributed to their children equally.
Should one or more of the children predecease them, Elizabeth and Wayne wish for that child’s designated benefit to be distributed to that child’s children (Elizabeth and Wayne’s grandchildren) instead of between the surviving children of Elizabeth and Wayne.
However, grandchildren are ordinarily not SIS dependants, meaning they could not be nominated under a BDBN.
Given the extent of their wishes they accept that a Complex BDBN will be required, to cater for their estate planning decisions, to be structured as follows:
- firstly, if Elizabeth survives Wayne then Elizabeth’s death benefits pass to Wayne and vice versa;
- should no spouse survive, the benefits:
- will pass equally between the three children of Elizabeth and Wayne, and
- thirdly, if any child does not survive both Elizabeth and Wayne then the share they would have received had they survived is to be paid to the member’s LPR (i.e. LPR for the latter to die of Elizabeth and Wayne) to be dealt with under the terms of their Will.
Depending on the provisions of the trust deed for the Fund, be the nomination of a single ‘layer’ of beneficiaries.
Multiple layers, specific terms and the gifting of specific assets can be attended to utilising a range of BDBN options available, provided the trust deed permits, as detailed in the table below
Should you have any queries, or require more information, please contact the team at Topdocs on 1300 659 242.
- The ability to direct specific assets to nominated beneficiaries is a complex issue and will most likely only be effective if the SMSF has segregation of assets between members or is a single member fund.
- Topdocs can provide documentation to enable the addition, amendment or removal of Reversionary Pension Nominations.
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