Binding Death Benefit Nominations: What happens to your superannuation after death?

If you have a valid will, you may assume that when you die your superannuation will automatically form part of the estate. However, this is not the case. Where you have not made a Binding Death Benefit Nomination, the superfund trustee has the power to decide who receives your retirement savings. This will be the case even where you have a self-managed superfund.

Unlike the executors of your will, the trustee is under no obligation to take your wishes into account, meaning your entitlements may not be distributed to your intended beneficiaries. For this reason, it is important that you nominate a beneficiary to ensure your superannuation is distributed in accordance with your wishes.

Requirements for a Valid Binding Death Benefit Nomination

When you create a Binding Death Benefit Nomination, you don’t have the power to nominate just anyone as a beneficiary. In order to be valid, you must only nominate someone who is considered your ‘dependant’. In the context of superannuation, a dependant can include your spouse or de facto partner, your children, any person who is financially dependent on you, a person with whom you have an interdependent relationship, or as is often preferable, your legal personal representative. Failure to comply with this requirement could render your nomination invalid.

Once you have determined who should receive your superannuation, you will need to ensure your nomination is signed in the presence of two witnesses over 18 years of age. These witnesses will be required to each complete and sign a witness declaration. It is common for people to assume that they can have their beneficiaries witness the nomination, but this is not the case. To preserve the validity of your nomination, it is essential that witnesses be entirely independent.

Importantly, a Binding Death Benefit Nomination will not become immediately valid after it is signed. It will only take effect once received by your superfund’s trustee. You must make your nomination in writing, clearly setting out the proportion of benefit to be paid to each person nominated. In most cases, your superfund will have a standard form where you can your nomination.

Provided your Binding Death Benefit Nomination satisfies these requirements, it will generally be binding for three years or until you change, update, or revoke it. The trustee will be bound to follow the instructions contained within your nomination even if your circumstances have changed. For example, if you have separated from your spouse or de facto partner but are not yet divorced, your ex-partner may still be entitled to the benefit. A divorce, however, will nullify your nomination. For this reason, it is essential that you regularly reassess your nomination to ensure the protection of your superannuation.

Taxation of Superannuation Death Benefits

It is important to make the distinction between the definitions of a ‘dependant’ within tax law and superannuation law. There are a number of similarities between the definition of dependency within these contexts. For example, your spouse or de facto partner, any children under 18 years old, and persons in an interdependency relationship are all considered dependants under both superannuation and tax law. However, while children over 18 years old will always be considered dependants in the context of superannuation, this is not necessarily the case for tax law.

Tax law provides that your dependants may pay a lower tax rate for superannuation death benefits compared to non-dependants. Many people presume that this means that nominating a legal personal representative as beneficiary will negatively impact dependants seeking taxation benefits. However, tax law adopts what is called the ‘look through’ approach.  In determining the amount of tax payable by your beneficiaries, the ‘look through’ approach considers whether the final recipient of your superannuation disbursement is a dependant according to tax law. Therefore, even where a legal personal representative is nominated as your sole beneficiary, your dependants will still be eligible to receive taxation benefits.

Perspective Law specialises in establishing clear and comprehensive estate plans individualised to the needs of our clients. If you are interested in nominating our firm as your legal personal representative or wish to ensure your assets and superannuation are adequately protected, please call Tony today on 3839 7555 or email Tony.Crilly@Perspectivelaw.com.

More Changes -Six member SMSFs

As we have come to expect, the federal Government has enacted further changes to self managed super funds. From 1 July 2021 self-managed super funds (SMSF) are able to have up to six members.  Previously a maximum of four members were allowed.  The majority of funds have either one or two members, usually established for the benefit of spouses.

The increase in members may suit larger families and can decrease the administrative costs of operating more than one SMSF.  However, there are certain matters to consider if you are intending on expanding your SMSF. 

  1. SMSF Structure

Members are required to be represented at the trustee level, either by individual trustees or a corporate trustee. For funds with more than one member:

  • Each member must be an individual trustee; or
  • Each member must be a director of the corporate trustee.

It is important to note that State and Territory Legislation governs the number of trustees that a trust can have. The Legislation should be checked prior to making any change if you currently have individual trustees.  It is likely that a corporate trustee will be required and this is strongly recommended.

The company constitution may stipulate rules regarding meetings of directors and voting rights and these need to be carefully considered.  It is possible for the voting rights of members to be based on their member balance as opposed to each director having one vote.  This is critical when considering th emanagement of the super fund in the context of a death benefit to be paid to the estate of a member or a nominated dependent.

The increase in members can reduce efficiencies in decision making and the management of the fund if the members do not agree on investment or other matters for the fund.

  1. Dispute resolution

Steps can be put in place to reduce the difficulties with decision making and to assist in dispute resolution.  This may include tailoring the deed or other documents, including:

  • Providing members with exit rights that do not jeopardise investments;
  • A co-ownership agreement to deal with assets that are difficult to divide;
  • Modifying the constitution for the trustee company regarding decision-making, such as restricted issues, voting rights according to member balances or where a unanimous decision is required.

It is essential that advice be obtained to ensure that adding specific provisions to the trust deed does not cause the SMSF to cease being a regulated fund.

  1. Investment

How superannuation is invested can be key.  Having additional members to the fund can provide additional investing power.  The intergenerational transfer of assets can also be tax-effective.

It is important that all members agree on the long-term goal for the fund.  Younger members may seek longer investments or have different interests.  They may be more prepared to invest with a higher risk level.  These differences can cause issues when investing.

  1. Paying Benefits

The control of the SMSF after one member dies and the release of their death benefits needs to be carefully considered.  If the remaining trustees have control over the payment of death benefits then there is a risk that they could pay the benefits according to their own wishes.  

Ensuring you have a valid death benefit nomination in place is even more important in a fund with multiple members to ensure that your superannuation is paid in accordance with your wishes. Alternatively you can establish a reversionary pension depending on your dependents. 

It is possible to have your legal personal representative automatically become a director of the corporate trustee on your death.  You should review your trust deed to ensure it provides for this and that the process cannot be hindered by any remaining members of the fund.

  1. Conclusion

If you are considering increasing the number of members in your SMSF you will need to review your current SMSF Trust Deed to see what it allows.  SMSFs with several members can provide greater opportunities for investment.  However, it is important that all members understand the purpose of the fund and are able to work well together.  Steps should be put in place to minimise disputes, particularly to cover members who wish to leave the fund. If we can assist you with your SMSF, including establishing the fund or updating the terms of your trust deed, please contact Tony Crilly at Tony.Crilly@Perspectivelaw.com.

Insurers – Claims for Business Interruption and Coronavirus

We all hate to pay for the premiums, but insurance policies are a necessary element for managing business risk. We have taken a look at the regime regarding insurance and the effect on policies during Covid and found a surprising result.

The unprecedented impact of the global pandemic has been detrimental to thousands of businesses across Australia. In the face of Government regulations, businesses have been forced to close temporarily causing them significant financial and emotional burden. Despite holding business interruption insurance, many insurers have led policyholders to believe that losses as the result of COVID-19 will not be protected by their coverage. However, a recent unanimous decision of the NSW Court of Appeal favouring policyholders indicates that insurance companies may still be liable to pay these claims.

The Insurance Council of Australia (ICA) has commenced two test cases to be heard by the Court in order to seek clarity regarding the interpretation of Business Interruption Insurance policies in the context of the pandemic. The first case heard by the NSW Court of Appeal contemplated whether exclusion clauses for claims related to ‘quarantinable diseases’ under the Quarantine Act 1908 will extend to exclude losses caused by COVID-19.

The Quarantine Act 1908 is no longer in force, but it has since been replaced by the Biosecurity Act 2015. COVID-19 has been defined as a ‘listed human disease’ under this new legislation. Though this concept is arguably similar to that of a ‘quarantinable disease’ under the Quarantine Act 1908, the Court held that the clear wording of the policies meant the exclusion could not extend to an application of the Biosecurity Act 2015.

On 25 June 2021, the High Court denied insurers’ application to appeal this decision. Consequently, businesses who have experienced disruption due to COVID-19 are afforded substantial protection. Insurers who have failed to update their policies after the repeal of the Quarantine Act 1908 will likely be compelled to pay businesses who faced loss due to the pandemic.

While the decision in this first test case favours the interest of businesses, there is still ambiguity concerning the interpretation of policies in the context of COVID-19. However, these ambiguities will inevitably be clarified during the second test case. This case, which will likely commence trial in August, will consider the meaning of wordings related to the definition of disease, proximity of an outbreak to a business, and prevention of access to premises due to a government mandate. Until the court provides such guidance, insurance companies should be hesitant denying claims arising due to the impacts of COVID-19.

If you believe your insurer has incorrectly denied your business interruption insurance claim, or if you want to find out whether you may be protected for COVID-19 related loss, email us at info@perspectivelaw.com to talk about how we can help.