BDBNs — what to look out for and what to avoid
Binding death benefit nominations can be a useful tool in SMSF estate planning, but there can be pitfalls for the unwary.
A binding death benefit nomination (BDBN) is a direction made by a member to the superannuation fund trustee requiring the trustee to pay the member’s superannuation death benefits in a certain way, eg, to the member’s dependant(s) and/or to their legal personal representative(s) (ie, the executor(s) of the member’s will).
BDBNs are usually set out in standard forms and are typically available for members of both large and small funds. This article will cover the most common advantages and disadvantages of BDBNs and provide a few tips on how to identify their best use.
BDBNs — small versus large funds
In an SMSF context, a BDBN depends on the wording in the particular fund’s deed, as the BDBN rules in reg 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR) are not generally applicable to SMSFs. BDBNs can, for instance, where the deed is appropriately worded, also specify the manner of payment, eg, lump sum or pension.
However, we often see SMSF deeds that include some or all of the BDBN rules in reg 6.17A in their deeds either expressly or implicitly (via the fund’s general deeming clause that, broadly, may include any ‘applicable standard’ that an SMSF must comply with to continue to be eligible for concessional tax treatment and more). SMSF deeds drafted in this way will significantly reduce the effectiveness, longevity and versatility of a purported BDBN, as BDBNs are a creature of the deed. Accordingly, undertaking a deed review or update is important when considering estate planning and BDBN drafting in an SMSF. For more information regarding our BDBN deed update, see the BDBN website.
Regulation 6.17A applies to BDBNs made for most non-SMSF funds, including large public-offer retail or industry superannuation funds and small APRA fund. This means that a BDBN made by a member of one of these funds can generally only last for a maximum of 3 years (the 3-year sunset period). Some funds offer non-lapsing non-binding nominations, as an alternative to a BDBN so members do not have to renew their nomination every 3 years. The non-binding nature (they do not have to be followed) of these alternative nominations, however, mean that members run the risk that the trustee may ignore their nominated wish (eg, some trustees will not follow them upon certain events, such as a relationship breakdown).
Benefits and uses
In an SMSF context, a BDBN used in conjunction with an appropriately drafted SMSF deed can provide a simple and effective solution for achieving greater certainty regarding what is to happen to a member’s superannuation benefits upon their death.
We now briefly consider certain popular BDBN strategies which illustrate how a well drafted BDBN can be a powerful and important tool in a member’s succession planning toolkit.
A. Avoiding payment to the estate: risk of legal challenges or insolvency
A BDBN in favour of a member’s dependant(s) may be a sensible precaution to take where a member’s deceased estate could face legal challenges, such as testator’s family maintenance claims. In such cases, directing the trustee to pay the member’s death benefit directly to their dependant(s) such as their spouse and children avoids claims against the estate. Note that in New South Wales there is a concept of ‘notional estate’ which can result in assets bypassing a person’s estate (eg, super being paid direct to a dependant spouse or child) being considered part of their estate for testator’s family maintenance purposes as was the recent case in Benz v Armstrong  NSWSC 534.
Similarly, an insolvent member may wish to consider making a BDBN directly to their dependant(s), rather than their estate, to protect their superannuation from creditors against their deceased estate. Making a BDBN may be a prudent strategy to put a death benefit outside the reach of creditors, even though superannuation already has certain bankruptcy protection under section 116(2)(d) of the Bankruptcy Act 1966 (Cth). For example, the bankruptcy protection is lost if the super is paid via a deceased estate - see Cunningham v Gapes  FCA 787 where a distribution from the estate came from a death benefit lump sum payment from the deceased mother’s superannuation fund was not protected.
B. Placing extra conditions on the money’s use: risk of poor management
Conversely, a member’s family situation may warrant making a BDBN to pay any death benefit in favour of the member’s estate (to their legal personal representative). For example, if a member has concerns about entrusting their surviving spouse or children with their superannuation benefit, they can leave the decision to their executors to follow any directions in their will which may result in their super moneys being managed in a discretionary testamentary trust with one or more independent executors. This may provide added accountability and overcome leaving the control of the super moneys in the hands of the surviving spouse or children.
Problems and pitfalls
However, when speaking of BDBNs, a word of caution is warranted because as, having only been introduced from 1 July 1999, BDBNs are a relatively new legal instrument. The law in respect of BDBNs continues to develop and evolve over time, and many pitfalls exist for the unwary. Keeping pace with these developments and seeking appropriate advice from expert advisers is critical. Indeed, it was only in June 2022 that the High Court in Hill v Zuda Pty Ltd  HCA 21 confirmed that reg 6.17A of the SISR does not apply to BDBNs made in respect of SMSFs and clarified the law on this important point. Although this decision was consistent with prior decisions of various state supreme courts, but it nonetheless represented a welcome confirmation of the legal position in support of SMSF BDBN strategies on an Australia-wide basis.
Additionally, as noted above, a standard form BDBN template is typically unique to the particular SMSF deed that it is supplied with. There are many versions and approaches applied between firms and states. When attempting a BDBN, it is vital that the deed supports the format, duration and terms of the BDBN so that it is valid and does what the member intends. It is therefore important that you seek out a quality supplier with appropriate expertise to ensure you minimise the risk of invalidity and any potential dispute.
A. Invalid deeds
The current deed and any related BDBN strategy that hinges off this purported current deed are likely to be invalid or on shaky ground if the deed has not been properly varied. This means that if any prior deed of variation has not been varied according to the prior deed and any relevant conditions and consents in the variation power have not been complied with, the deed of variation is unlikely to be valid and enforceable. The prior variation power usually requires certain formalities to be complied with. Unless all the formalities to vary the deed have been complied with in the fund’s document trail history, the fund’s latest deed may not be valid and effective. This, in turn, results in BDBNs and other strategies undertaken on the basis of an ‘invalid’ deed being easily challenged.
Regrettably, and despite the critical importance of the deed foundation, most SMSF deeds these days are varied without proper checks on the prior document trail and on the formalities (eg, the conditions and consents that must be satisfied) for each variation. Moreover, some suppliers provide a number of options to a BDBN, such as the ability to prepare an SMSF Will or death benefit rule to be used as an alternative to a BDBN. Further, some suppliers encourage advisers and clients to vary the deed themselves without any input from a qualified lawyer. These developments are giving rise to considerable risk especially as there is no case law authority for the concept of what is an SMSF Will or death benefit rule (in contrast to the well-established case law over many years as settled recently by the High Court on BDBNs). Indeed, many popular terms do not have a clear meaning. For instance, the High Court in CPT Custodian Pty Ltd v Commissioner of State Revenue  HCA 53 stated that the term "unit trust", like "discretionary trust", in the absence of an applicable statutory definition, does not have a constant, fixed normative meaning. If you would like to be supported by established case law, the BDBN is the ‘simple and elegant’ instrument to use.
If the SMSF has existed for some time and undergone variations from time to time, particularly without using experienced SMSF lawyers, a deed history review is recommended. Such a review should encompass the original deed of establishment, any subsequent deed of variation, and any deeds of change of trustee, as well as any other document that may have varied the deed (eg, trustee resolutions). Moreover, the review should be conducted by an experienced adviser, preferably an SMSF lawyer, to see if remedial work is required to help ensure the SMSF’s ‘deed chain’ is as resilient to challenge as possible. Remedying any issues in a timely manner is generally far more cost effective than being exposed to future legal challenge as any legal dispute could end up costing several hundred thousand dollars and result in considerable lost time and uncertainty.
B. Sloppy wording
SMSF deeds are not generic documents and many SMSF deeds are unsatisfactory, especially in relation to BDBNs. Despite the High Court’s confirmation that reg 6.17A does not apply to an SMSF, there are still many SMSF deed suppliers that provide BDBNs with a 3-year expiry date, regardless of their clients’ needs, and many of these are easily challenged due to poor wording.
Examples of phrases that continue to increase the risk of disputes, especially between trustee and potential beneficiaries include ‘the BDBN is only binding if it’s to the trustee’s satisfaction’. This type of wording can easily give rise to argument if, say, the trustee is the second spouse who decides to reject the BDBN when their spouse dies. References to discretion or vague/undefined terms (including ‘trustee of my estate’) are avoidable and can be discussed with members prior to drafting.
Other key risk points are when notice and service requirements are unnecessarily included in BDBNs. Such requirements should be avoided.
BDBNs are a powerful and important tool in a member’s succession planning toolkit.
We recommend that SMSF deeds be obtained from a quality law firm that has expertise in the field of SMSFs, succession planning and tax. Unless you are obtaining documents from a qualified supplier, there are numerous risks for an adviser and end-user client.
By Cassandra Hurley, Daniel Butler and William Fettes of DBA Lawyers
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.