SMSF death benefits: Who are my dependents and why does it matter?

Most SMSF trust deeds allow the fund members to nominate the intended recipient, or recipients, of any death benefit that may become payable from the fund.

To be valid, this “death benefit nomination” process needs to be carried out in accordance with both the general Superannuation Laws and also in line with any SMSF specific requirement that may exist, which would usually be documented in the trust deed.

Where a member fails to provide clear instructions or where a completed nomination is deemed invalid, the remaining SMSF trustees will make the final decision about who will receive your death benefit. They may decide to pay it to your estate where your member balance will form part of the overall estate assets. Alternatively, they may choose to pay the death benefit to one or more of your eligible beneficiaries. The key issue here is that there is no certainty of the outcome.

There are different types of death benefit nominations that can be used by SMSF members, each with their own pros and cons.

The main types of nomination include:

• Non-binding death benefit nominations
• Binding death benefit nominations
• Non-lapsing death benefit nominations

Non-binding death benefit nomination

If you are looking for some level of control over who your death benefits should be paid to but also allow some flexibility, then a non-binding nomination could be considered.

A non-binding nomination simply acts as a guide or suggestion to the remaining SMSF trustees. As the name suggests, the remaining SMSF trustees are not legally bound by this nomination.

It is worth noting that this trustee ‘discretion’ can prove beneficial in certain scenarios as it can allow the remaining SMSF trustees to consider the personal circumstances of both you and your intended beneficiaries at the actual time of the death benefit payment and can allow the payment to be made to the most appropriate person at that time.

If you decide to use a non-binding nomination, it is important to refer to your SMSF trust deed for any fund-specific requirements and rules to ensure that a valid nomination is made. These usually require the nomination to be in writing, signed by you as the member and dated. You should also check any trust deed specific requirements around witnessing as these rules can differ.

In summary, a non-binding nomination:

• Does not give a guaranteed outcome. The SMSF trustees have the final say and they can choose to ignore your wishes.
• Can result in unintended outcomes.
• Provides flexibility and can allow payments to be made to the right person at the relevant time – especially where your circumstances or your beneficiaries circumstances have changed.
• Although not specifically required under legislation, your SMSF trust deed may require that you renew your nomination to remain valid.

Binding death benefit nomination

If you are looking for a more certain outcome, then you could consider using a binding death benefit nomination. As the name suggests, so long as the nomination is valid, the remaining SMSF trustees are ‘bound’ to pay your death benefit to the beneficiaries you have nominated and in the proportion that you have nominated. It removes any trustee discretion as to who and how the benefits can be paid.

Certainty of outcomes is often beneficial for members with blended families or where special needs exist such as disabled children.

Binding nominations can also allow death benefits to be paid out faster as the remaining trustees are not required to consider who is the most appropriate recipient.

In summary, binding nominations:

• Provide certainty as to who will be the beneficiary.
• Allow no flexibility. If your circumstances or your beneficiary’s circumstances have changed, it can lead to unintended outcomes.

May require specific wording in your SMSF trust deed.

Hill vs Zuda – High Court case decision

A 2022 High Court case involving an SMSF focused on the payment of a death benefit from the fund under a binding death benefit nomination.

Under the laws that govern most super funds, a member is required to ‘renew’ their binding death benefit nominations every three years. If this process is not carried out, the nomination essentially lapses and becomes invalid.

The Hill vs Zuda case looked at this three-year rule and how it applies specifically to SMSFs and, in particular, how it applied to the SMSF in question. Throughout the case, it became clear the rules for an SMSF could in fact differ from those for retail or industry super funds.

The outcome from the case was that where an SMSF trust deed allows, a binding death benefit does not automatically lapse after the three years. It can remain in place indefinitely.

A further outcome was that the usual witnessing requirements (the need to be witnessed by two independent people) applicable to retail or industry super funds for a binding death benefit nomination to be valid do not automatically apply to all SMSFs.

These outcomes were a result of the specific wording set out in this particular SMSFs trust deed. Therefore, to be sure that any nomination you have in place is valid, you MUST always check your own SMSF trust deed and comply with the rules it sets out.

Non-lapsing binding nominations

Separate to the above legal case, you can put in place a non-lapsing binding death benefit nomination that does not expire and can remain valid and in place until such time as you cancel or replace it with a new binding death benefit nomination.

Once again, you need to check your own SMSF trust deed to see if it allows for these types of nominations and also check for any requirements that need addressing.

In summary, non-lapsing binding nominations:

• Provide certainty as to who will be the beneficiary.
• Allow no flexibility. If your circumstances or your beneficiary’s circumstances have changed, it can lead to unintended outcomes.
• May require specific wording to be used in your SMSF trust deed.
• Never expire, so it is essential to review them regularly as your personal circumstances change.

The bottom line

No matter what kind of nomination you deem appropriate, you should review it regularly to make sure it remains appropriate for your needs.

As your personal circumstances change, you should consider whether changes to your nominations are warranted to achieve the outcome you desire.