Documentation vital in BDBN payouts, says legal expert
Binding death benefit nominations and other estate planning documents need to be prepared with contingencies in mind in case circumstances change, says a legal adviser.
Hayley Mitchell, partner at Cooper Grace Ward Lawyers, said advisers need to ensure their clients revisit estate plans and BDBNs regularly to make sure they remain valid.
In a recent webinar, Ms Mitchell said conflicting documentation around BDBNs can impact the wishes of a member after their death.
“These can include conflicting nominations in reversionary pensions compared to the binding nomination or to the terms of the will,” she said.
It is particularly important for SMSFs under a corporate trustee structure, Ms Mitchell said. She explained that if the sole director of a corporate trustee has died, advisers need to make sure all documentation matches so death benefits can be paid without issue.
“Documents need to be drafted in such a way that ultimately the death benefit gets paid where the member wants,” she said.
She added that trustees need to know how BDBNs and reversionary nominations work in conjunction, by examining the terms of the documents and the trust deed to determine whether the nomination is valid.
“That's a really important step, because the trustee will then need to make a decision about whether they need to – or should – follow that nomination.”
Disputes most often arise if the trustee decides not to follow the nomination, and it is then their responsibility to exercise discretion about how they're going to pay that death benefit.
“Either the trustee has determined that the nomination is valid but another party disagrees and asks the trustee to exercise discretion in their favour, or the trustee determines that it's not valid,” she said.
The decision about who can receive death benefits is defined in the SIS legislation, and in both self-managed funds or retail funds death benefits cannot be paid to anyone outside the definition of a SIS dependant unless they are being directed to the deceased’s estate.
“That limits to whom death benefits can be paid. It has to be a spouse of the deceased, or a child of the deceased, or someone in an interdependent relationship,” she said.
Additionally, several factors need to be satisfied or considered in determining whether someone is in an interdependent relationship with the deceased member, or was at the date of their death.
“It might be that an adult child was financially dependent on the deceased member, which would have a different tax consequence to whether the adult child was completely financially independent,” she added.
