Format, formalities crucial to BDBNs: expert
If you don't nominate the correct person to receive a superannuation death benefit or if it is not in the correct format, it will be invalid, says an SMSF specialist.
Chris Reed, SMSF specialist with Business Concepts Group, said in a recent webinar there are very specific guidelines as to whom superannuation death benefits can be directed.
“You can direct your superannuation death benefits to your estate through your legal personal representative, however, that does not always automatically happen,” he said.
“So, it is important that trustees correctly nominate and document their wishes as to where they want their death benefits directed.”
Mr Reed said under the SIS Act there are specific dependents to whom death benefits can be directed including a spouse – de facto or same-sex – children of any age, or someone with whom the trustee has an interdependent relationship.
“If people don't fit into any of those categories, they cannot receive your death benefits directly,” he said.
However, if superannuation is directed to the estate, it can be left to whomever the deceased has nominated in their will.
Mr Reed said due to the restrictions surrounding death benefit nominations, it is important SMSF trustees understand the governing rules of their fund to ensure it does not contradict information that may have been included in a death benefit nomination form.
This includes checking the wording of the nomination documentation to make sure it is consistent with the governing rules of the fund and that it is also compliant with the deed.
If the trustee has nominated someone classed as a being in an interdependent relationship, they must meet that criteria at the time of the trustee's death or the nomination will be invalid.
“You may have someone that you want to leave your superannuation to that fits that criteria when you're completing the form and doing your death benefit nomination, but it could be a few years later you pass away and the relationship has changed,” he said.
“The criteria has to be met at the point in time of your death for that person to be able to receive the death benefit, so it is important to review and update death benefit nominations.”
If using an older deed that may have an expiry date, it can be beneficial to update the governing rules to remove that condition.
Mr Reed said it is also important to decide how the death benefit should be paid, either as a lump sum or a pension.
“Pensions can be a bit restrictive and usually only a spouse or minor children would be eligible to receive a pension or if the nominee is financially dependent,” he said.
“However, if the death benefit is coming out of the estate as a lump sum, you have to make sure you have a valid will that caters for that otherwise it will end up in no man’s land.”
For this reason, Mr Reed said it is important for SMSF trustees to ensure their superannuation documentation is done in conjunction with any real estate planning.
“A lot of funds have big lumpy illiquid assets such as property and the lump sum payment does not necessarily have to be in cash,” he said.
“You can transfer assets out of a self-managed super fund, however, pension payments have to be made in cash so liquidity is important to ensure there is enough cash flowing through the fund to pay those pensions.”
