SMSF Binding Death Benefit Nomination – what happens to Super when you die?
Superannuation is for your retirement. However, a dead person no longer needs retirement money. Therefore, at death, the Superannuation leaves this wonderful low taxation and asset protection vehicle.
Superannuation is paid out at death. The only exception is a Reversionary Pension to a spouse or young child.
What is a Binding Nomination?
But who gets your super at death? An SMSF Binding Death Benefit Nomination directs where your super goes at death. It either goes to a person (dependent) or into your Will.
A Binding Nomination is a direction by a fund member. This is to the superannuation fund trustee. It forces the trustee to pay the member’s death benefits in a certain way to:
- the member’s dependents; or
- the member’s legal personal representative (LPR).
The LPR is the executor named in your Will. Or, if you have no Will to your Administrator appointed by the court.
Is Superannuation an estate asset?
However, your Superannuation is not an estate asset. It does not automatically go into your Will. What happens if you have no binding nomination? The SMSF trustee pays out your Super as it sees fit. Fight back. A binding death benefit nomination overrides the trustee’s discretion.
If your super goes to an adult child then the tax rate is up to 17% or even 32% tax. A superannuation testamentary trust in your Will potentially reduces that non-dependency death tax to zero.
Why use an SMSF death benefit binding nomination?
SMSF Binding death benefit nominations provide certainty. They ensure that upon your death, your super is paid according to your wishes. It removes the SMSF trustee’s discretion.
If there is no binding death benefit nomination, then the only condition is that the trustee’s decision to pay the benefits is ‘fair and reasonable’. See Stock (as Executor of the Will of Mandie, Deceased) v N.M. Superannuation [ 2015] FCA 612.
Without a binding nomination, the Superannuation trustee has unfettered discretion. This is to pay the benefits as it deems appropriate. The trustee:
- is only bound by the superannuation trust deed; and
- is not bound by any supplementary direction – your wishes and Will are not relevant.
Who is the trustee of your Self-Managed Super Fund? Is your trustee your second wife? Is it only the children of your first marriage? It is just one of your children?
The SMSF Trustee can and often does, greedily transfer the superannuation just to themselves. This is unless you make an SMSF non-lapsing binding nomination.
Can my Will control where my superannuation goes?
Can a Will control your superannuation death benefits? The courts continually say no.
Consider the old Superannuation Complaints Tribunal’s 2012 decision D11-12/066. The dead wife ‘forgot’ to sign a binding death benefit nomination. In fact, she signed no nomination at all.
Instead, she signs a Will. Her Will appoints her defacto husband, son and daughter as her Executor. Executors are also called ‘legal personal representatives’ (LPR).
(It is rather confusing. This is because nomination forms have to use only one expression. This is a ‘legal personal representative’. The binding nomination forms cannot use, perhaps, more useful expressions such as ‘my Will’, ‘my estate’, or ‘executors’. Instead, you must only use the expression ‘legal personal representative’ in a superannuation binding nomination.)
The Specific Gift in the Will gives her Superannuation to only her husband.
Correctly the trustee of the superannuation fund:
- ignores the Will
- notes that there is no binding nomination.
Without a binding nomination, the super goes into the Will. The super is paid out under the terms of the Will. It no longer goes all the husband.
The husband challenges the decision. He argues that it is unfair and unreasonable. This is given that his wife left a Specific Gift of the superannuation just to him.
The husband desperately argues that this Specific Gift is the death benefit direction. (Why do people do this? They always lose.)
As is always the case, the Tribunal upholds the decision of the superannuation trustee. This is for the trustee to distribute the superannuation benefit to the deceased’s estate. This is held as fair and reasonable under the law. The trustee’s decision is acceptable under the superannuation deed and the superannuation law. The Tribunal goes further and states it is the correct decision.
It is silly and wrong to believe that superannuation is controlled by a Will.
Sure, a Superannuation Testamentary Trust in a Will can get rid of the 32% death tax on superannuation. But it cannot force the superannuation trustee to pay the super into the Will, in the first place.
Here are lost cases of people who do not believe me:
- Hill v Van Erp (1987) 188 CLR 159
- Badenach v Calvert  HCA 18
- Rockman v Fast  VSCA 262
- Howe v Fischer  NSWCA 286
- Riz v Perpetual Trustee  NSWSC 1153
- Webb v Teeling  FCA 1094
Does the SMSF Deed allow for Binding Nomination?
Many SMSF Deeds state that a binding nomination is only completed on the exact Nomination Form contained in the Deed. However, most Nomination Forms don’t comply with the new laws. Therefore, the SMSF can’t have binding nominations.
The bundle of documents you are about to build corrects faulty deeds and nomination forms. The documents also update the SMSF Deed as well. For example, it allows 6 member funds. You also get a fully compliant SMSF Nomination Form as part of the bundle.
Legal Consolidated also updates your SMSF Deed. This ensures that your SMSF can set up binding nominations.
Build the SMSF Binding Death Benefit Nomination. The pack includes:
- Our cover letter of advice
- Deed of Variation – this updates your SMSF Deed to allow for binding death benefit nominations
- Death Benefit Agreement (binding on Trustee and does not expire)
- Updated Product Disclosure Statement.
Who gets my Super at death?
You can only nominate a:
- superannuation dependent; or
- legal personal representative (which is the trustee in your Will)
A ‘dependent’ includes:
1. your spouse and de facto (includes same-sex)
2. your children of any age (including adopted)
3. any person financially dependent on you
4. any person in an interdependency relationship with you
5. your ‘legal personal representative‘ – the executor in your Will (LPR).
Adult children pay 32% tax on their Super
Your adult children pay 17% or 32% tax on your Superannuation. The death tax is on the concessional amount. Put a ‘Superannuation Testamentary Trust’ in your Will. The Super Testamentary Trust seeks to reduce the death tax to zero. You then nominate, in your binding nomination, your ‘legal personal representative’. You do this by ticking the ‘legal personal representative box’. Your Super then goes into your Will. The Super Testamentary Trust seeks to reduce the super death tax to zero.
‘Legal Personal Representative’ v’s ‘my estate’ – Munro v Munro
If you have a Superannuation Testamentary Trust in your Will then you should leave the superannuation so it goes into your Will. But in the binding nomination, you don’t use the expression ‘my estate’ or ‘my Will’. Instead, you only use the expression ‘legal personal representative’. Our binding nominations comply with Munro v Munro  QSC 61.
See what happens if you use a website that is not a law firm to build your binding nominations: /many-binding-death-benefit-nominations-built-on-non-law-firms-websites-don’t-work/
How can I control where my Superannuation goes at death?
Three things control where your Superannuation goes at death:
- Trust Deed
- Trustee’s discretion
- Binding Nominations
Four ways to deal with your Superannuation at death:
1. do nothing: The trustee or the SMSF deed) decides where your super goes at death
2. non-binding nomination may help the trustee decide, but the Trustee may just ignore it
3. binding death benefit nomination that expires every 3 years – provided you die within the 3 years your Trustee must follow your binding nomination – it is binding on the Trustee
4 Legal Consolidated non-lapsing binding death benefit nomination – never expires and it binds the Trustee
The Legal Consolidated Deed of SMSF Variation you are building allows you to opt for any of these.
Amend both the SMSF Deed and Binding Nomination.
High Court in Hill v Zuda Pty Ltd
Yes, you must update both the SMSF Deed and provide for the Binding Nomination form. We do both. This is why binding nominations are controlled by:
- Section 59 Superannuation Industry (Supervision) Act 1993 (SIS Act)
- Regulation 6.17A Superannuation Industry (Supervision) Regulations 1994 (SISR)
But they do not apply to Self-Managed Superannuation Funds. See Hill v Zuda Pty Ltd  WASCA 59. Confirmed by the High Court in Hill v Zuda Pty Ltd  HCA 21.
In Hill v Zuda, the SMSF binding death benefit nomination (BDBN) fails. This is because the SMSF Deed bizarrely requires that the nomination complies with Regulations 6.17A. This is an extra burden that the SMSF did not, otherwise, have to overcome. Anyway, the nomination did not comply with reg 6.17A. This was because it had these extra hurdles:
- lapsed after 3 years, and
- was NOT witnessed by two people
Can SMSF provide non-lapsing binding nominations?
I started practicing in 1988. At that time we did not have the answer to that question. We also did not know whether we needed one or two witnesses for a non-lapsing binding nomination.
It was 20 years later that the ATO answered. SMSF Determination 2008/3 confirms that section 59 SIS Act and Regulation 6.17A SISR do not apply to SMSFs. In Determination 2008/3 the ATO states:
“… the governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in regulation 6.17A of the SISR.“
The ATO confirms that it is possible to draft an SMSF’s trust deed to allow the binding death benefit nomination to last for more than three years.
From that point, your SMSF Deed can set its own peculiar rules about death benefit nominations. These are binding on the SMSF. They do not have to follow the rules set in Regulation 6.17A.
However, ATO statements are not law. We do not elect ATO officials. The Court follows legislation. It does not blindly follow what the ATO thinks the laws are saying. More important these cases say the SMSF Deeds can allow for binding nominations that can exist longer than 3 years:
When does an SMSF BDBN normally lapse under Regulation 6.17A(7)?
Regulation 6.17A(7) states a BDBN lapses:
- after 3 years from the day, it is signed
- unless resigned by the member; or
- the governing rules fix a shorter period
An SMSF BDBN now has additional requirements. It must comply with the SMSF Trust Deed. Let us say you follow all the rules. But the SMSF Deed has a ‘special’ additional rule. If you do not follow that ‘special’ additional rule then the nomination fails.
For example, I am looking at a new SMSF Deed built on an SMSF platform. It requires that the BDBN be on an attached form. However, the attached form only has one witness and a few other mistakes. So there is no way you can do a BDBN for this SMSF Deed. The Deed needs to be updated.
That is why when you build our SMSF binding nomination pack, we update your SMSF Deed as well.
Facts of the High Court’s Hill v Zuda
Zuda Pty Ltd is the trustee of the Holly Superannuation Fund, an SMSF. A member dies. His daughter challenges his BDBN. This is on the basis that it did not comply with regulation 6.17A.
The West Australian courts followed earlier decisions in other states that found that BDBNs in SMSFs do not have to comply with regulation 6.17A.
The High Court confirms that regulation 6.17A does not apply to BDBNs in SMSFs.
SMSF Binding Nominations need special care
A BDBN looks like a simple document.
- Superannuation Industry (Supervision) Act 1993 (Cth) (SISA)
- Superannuation Industry (Supervision) Regulations 1994 (Cth) (SISR)
Binding nominations have been available since 1 July 1999.
But there are still problems and complexity.
SISA and SISR can be interpreted so that SMSFs are not allowed to have non-lapsing binding death benefit nominations. This is not the case after Hill v Zuda.
Consider the case of Hill v Zuda Pty Ltd  WASCA 59.
The case confirms that the restrictions in SISA93/SISR94 do not apply to legally prepared BDBNs in SMSF Deeds.
Therefore, a BDBN can be drafted to be non-lapsing in an Australian Self-Managed Superannuation Fund.
Can my SMSF Binding Nomination be challenged?
Wooster v Morris  VSC 594
In Wooster v Morris the Husband and his second Wife are the trustees of their Self-Managed Super Fund. (Sure, most people have a company as trustee of their SMSF. But it is legal for humans to be the trustees of their SMSF, instead of the corporate trustee.)
The Husband has two beautiful daughters from a previous relationship.
The Husband makes a BDBN to his daughters. His daughters are also the executors of his Will.
The Husband dies.
After her husband’s death, the second Wife appointed her son as co-trustee of the SMSF. Together they swap themselves from human trustees to a corporate trustee. Of course, the second Wife is the sole director and shareholder of the corporate trustee.
His second wife ignores the BDBN. This is on a technical point. The BDBN is never given by the Husband (as a member) to his second Wife (as one of the trustees of the SMSF). The second wife never gets the BDBN in her capacity as trustee of the SMSF. Her Husband’s BDBN is not binding because it is never formally ‘delivered’ to her. Interesting argument.
As the Binding Death Benefit Nomination appears not to be valid the second Wife exercises her discretion. This is the controller of the SMSF’s corporate trustee. No surprises here. She gives herself all of her Husband’s superannuation in the SMSF.
But the two daughters are executors of their father’s estate. Can not the Will control the superannuation in the SMSF? The answer is, of course, no. The super has to somehow get into the Will before the executors can take control of the super. The executors are all-powerful over assets in the estate. The executors are all-powerful over assets in the Will. But superannuation does not automatically become part of a dead person’s estate.
After a huge and expensive court battle, the second Wife loses. The ‘technical’ fault is not enough to invalidate the husband’s BDBN to his two daughters. (As superannuation lawyers, we are fascinated with what other ‘mistakes’ you can make in an SMSF and still get a valid outcome.)
The second Wife is required to hand over the super to the Husband’s two daughters. To add insult to injury cover everyone’s costs of the litigation.
What if the dead person lies? Is the binding nomination still valid? “Estoppel claims”
Lucas v Salman
NSW Supreme Court gave two stepsons $211,893: This is because:
- Their dead father-in-law promised that they get his superannuation. When he died. But he lied.
- The father-in-law made the promise in exchange for the stepsons not claiming their late mother’s superannuation and estate. (This is different from a Contractual Will Agreement.)
Such is the dispute in Lucas v Salman  NSWSC 1301.
Facts of Lucas v Salman
The case is about an agreement. The father-in-law promises to give the step-children his super when he dies. This is if the step-children promise to not challenge their dead mother’s estate.
The step-children honor the promise.
After the father-in-law dies it then comes to light that he lied. He does not leave the super to the boys.
The step-sons argue that the father-in-law verbally promised them his super and a quarter of mum’s estate. This is called a “verbal representation”.
The “representations” are allegedly made in exchange for the boys not claiming the estate and superannuation of their late mother. Therefore, the father-in-law takes the estate and super of his dead wife. And the boys patiently wait for him to die, so they get what is left.
This is common. And the agreement is usually locked in by a separate document called a Contractual Will Agreement. These are built by Accountants and Financial Planners as a matter of course for Wills in second marriages.
Father-in-law secretly makes a new Will to cut out the children
His wife dies. He then quietly makes a new Will leaving the estate to:
- his brother (also the executor of his estate);
- his new spouse at the time of his death (talk about rubbing salt into the wound); and
- his two biological children from his first marriage
The stepsons get nothing.
The father-in-law’s superannuation of $211,893 is paid into his bank account.
The boys seek two remedies:
- breach of contract and estoppel for the father-in-law’s representation (the lie); and
- challenge both the father-in-law and mum’s Will – family provision application Succession Act 2006 (NSW).
Who wins: Soson-in-law dead father?
The boys win on the breach of contract argument.
The boys get the value of the superannuation: $211,893 (plus interest).
However, the boys failed to prove there was a contract with their father-in-law. Because it is ‘verbal’ these things are hard to prove. But the Court finds there is an agreement (called a ‘representation’) that the boys:
- do not challenge their father-in-law’s getting their mother’s superannuation ($202,000)
- in exchange for getting his superannuation upon his death.
This is called an ‘equitable estoppel’ And it goes like this:
- You promise to, say, give me the farm if I don’t go to university and stay on the farm – representation
- I do stay on the farm – so I perform my part of the bargain – in good faith – based on your promise
- You change your mind – you break your promise – and leave the farm to another person
- The court forces the promise to come true and gives me the farm – equitable remedy
Similarly, in Lucas v Salman, the father-in-law makes the promise: ‘You the super if you let me have your mum’s super’. The boys carry out their side of the bargain. They do not challenge mMum’sestate. The father-in-law breaks his promise (representation). The Court comes to the rescue. It intervenes and carries out the dead father-in-law’s representation.
The ‘estoppel’ is proved. And the equitable remedy is to fulfill the promise that the boys get their father-in-law’s superannuation. Accordingly, the Court awards the boys the superannuation.
What about the boys getting a quarter of the dead father’s estate?
Sadly, the Court found that those representations did not establish an entitlement to a quarter share of the father-in-law’s estate. The Court states that a higher threshold for certainty applies to Wills. The words “looked after” are too uncertain to establish promissory estoppel for the father-in-law’s estate.
Can the boys challenge their father-in-law’s Will?
The Court dismissed the boys’ family provision applications. This is under the Succession Act 2006 (NSW). This is for both their father-in-law’s estate and their mother’s estate. Are the stepsons “eligible persons”? Yes. They are. This is for their father-in-law. But that is still not enough of these facts. Also, a ‘considered person clause‘ in a Will makes it harder to challenge the Will.
Can the boys challenge their mum’s Will?
In most states, you only have 6 months to challenge a Will from the date of Probate.
The Court stated that the boys were “out of time” to challenge their mum’s Will. Further, their father-in-law’s claim as the surviving spouse is stronger. And, in any event, the boys had already won on their estoppel argument.
Witnessing of BDBNs – do not cut corners
There are strict rules for witnessing binding death benefit nominations (BDBNs). There are strict rules to witness any document. As lawyers, accountants, and financial planners we follow the rules.
ASIC banned a financial adviser for 8 years for not signing the BDBN properly.
Two witnesses must witness a BDBN. Both have to be present at the same time. Both witnesses must be in the same room. National Australia Bank at one time allowed one person to witness a BDBN with only one witness. The second witness signs later. This is the case, even though the second witness did not see the signing.
At best you would have to be stupid to believe that is acceptable.
Consider this ASIC Media statement dated 6 May 2021:
21-096MR ASIC bans former Sydney adviser for eight years
ASIC has banned Sydney-based former financial adviser, Lisa Lee, from providing financial services for eight years.
Ms Lee was a representative of Australia and New Zealand Banking Group Limited (ANZ) between 5 June 2010 and 15 June 2017 and Infocus Securities Australia Pty Ltd between 19 September 2017 and 19 November 2018. She is no longer providing financial advice.
ASIC found that while a representative of ANZ, Ms Lee falsely witnessed the binding nomination of beneficiary forms for 17 clients, backdated documents, and falsified a client’s signature on documents.
Financial advisers must act with honesty and integrity in their dealings with clients. ASIC may ban a financial adviser if it has reason to believe that they are not a fit and proper person to provide financial services or that they are likely to contravene a financial services law.
Ms Lee’s banning has been recorded on ASIC’s publicly available Financial Advisers Register and the Banned and Disqualified Persons Register.
Ms Lee has appealed to the Administrative Appeals Tribunal for a review of ASIC’s decision.
Australia and New Zealand Banking Group Limited falsely witnessed BDBNs, backdated documents, and falsified a client’s signature on documents.
In announcing the ban, ASIC mentions the failure to act with honesty and integrity and be of good fame and character, and the need to be likely to comply with the financial services law.
BDBN and Wills both require two witnesses
For a Will, there are two witnesses. They are both present and observe the will-maker signing the Will (or POA for that matter).
Consider Lewis v Lewis  NSWSC 1306. The son prepared a Will on behalf of his Mum.
He could not witness his Mum’s Will. And if he did he is automatically excluded from benefiting from her Will. See R F Hill & Associates v Van Erp (1997) 188 CLR 159. The boy arranges for two neighbors to witness her Will.
The son goes out. He comes home. Mum had signed the Will before the witnesses had arrived. And she had gone to bed.
The witnesses arrive. The son lets them know that Mum has signed. But gone to bed. Declaring: “This is not the right way to witness the will but I will have to deal with it at a later stage. Do you mind signing anyway?”.
This is not the correct procedure for either a Will or the signing of a superannuation-binding nomination.
What happens if the beneficiary himself dies before the superannuation is paid out?
In a Will, usually, you only need to outlive the Will maker by a minute. The gift from the Will maker’s Will is valid. This is the case even though the distribution from the Will had not happened before you died. The payout of superannuation benefits has different rules.
Webb v Teeling
The facts of Webb v Teeling  FCA 1094:
- the superannuation member dies
- there is a valid nominating of the superannuation to a dependant
- the dependant is alive at the time the member died
- however, the defendant dies before the death benefit is paid
- the superannuation fund no longer wants to pay the superannuation to the now-dead dependent
Sadly, the court decided that the death benefit could not be paid to the dead dependant (or rather, their estate). This is because the dead dependant is no longer a ‘dependant’ of the dead superannuation member.
This problem does not arise if you have a Legal Consolidated 3-Generation Testamenary Trust Will. All such Wills contain a Superannuation Testamentary Trust. This is primarily to reduce the superannuation death taxes. But, it also means that the nominated entity is the ‘legal personal representative’ (LPR) or in other words the Legal Consolidated Will.
As soon as the superannuation death proceeds are paid out into the Legal Consolidated Will the above rule no longer applies. This is another reason why Superannuation Testamentary Trusts in Wills is valuable.