Our last 'Your Knowledge' Newsletter talked of the importance of a Binding Death Benefit Nomination provided to superannuation funds, whether a public fund of a SMSF.  Here's a bit more information on their use and the importance of getting them right.

What is a Binding Death Benefit Nomination (BDBN)?

A BDBN is a notice given by a member of a super fund to the trustee, which requires a death benefit to be paid only to the member's nominated dependant(s) and/or legal personal representative as specified in the notice.  If correctly prepared and executed, the trustee is bound to follow the instructions outlined in the BDBN.  This provides certainty as to where the benefits will be paid on death.  Otherwise, it is at the discretion of the fund trustee as to who receives your benefits.

How long can a BDBN remain in force?

If the trust deed for the super fund specifically states that BDBNs prepared under the terms of the deed can be non-lapsing, the BDBN will not expire simply due to the passage of time.  However, if the trust deed for the fund does not have this specific provision, the BDBN may expire at the end of three years after the day it was first signed, or last confirmed or amended by the member.  It is recommended that trustees review them regularly to ensure their circumstances have not changed.

What level of detail can a BDBN contain?

Many pro-forma BDBNs offer members the opportunity to do no more than nominate one or more of their dependants and/or their legal personal representative and the proportion of the death benefit that will be paid to each of those persons, whereas they can do so much more.  For example, identify specific assets for particular beneficiaries, whether as lump sum or pension, or alternative beneficiaries in case one of the primary beneficiaries pre-deceases the member.

What are the alternatives to a BDBN?

A BDBN is one of a number of options available to members of a superannuation fund, when it comes to dealing with their benefits following their death.  Other options include leaving the decision to the surviving trustee, or to a Death Benefit Guardian who could be a friend or advisor who is aware of the member's wishes regarding disbursement of benefits.

When might a BDBN be appropriate?

Situations to use a BDBN include:

-          A member re-marries and provides a BDBN for her current husband.  If super is paid to her estate, it could be contested by the children of the first marriage.

-          Adult children may be divorcing, or bankrupt, or financially incompetent so the BDBN holds the moneys in a series of testamentary trusts that pay income but not capital.

-          Where one of the children is not a trustee, so the BDBN ensures each child receives an equal share.

What are the tax ramifications relating to a BDBN?

When proper estate planning is undertaken at the time of planning the BDBN, and at regular reviews, the impact of tax on the distribution is generally one of the major considerations.  The BDBN can permit the flow of money in a tax advantaged manner.  For example, the BDBN can be established to provide for under age children who would receive the benefit free of tax, whilst the Will provides for older children, who would otherwise be taxed on receipt of superannuation death benefits.