To BDBN or not to BDBN, that is the question
For a significant proportion of the Australian population, superannuation and life insurance held via superannuation will constitute one of their largest assets. However, there is a common misconception held by many that superannuation automatically forms part of the pool of assets distributed by their will.
The critical mechanism to obtain certainty about where superannuation benefits will ultimately pass is the binding death benefit nomination, aka BDBN. This is a short form provided by the superannuation fund under which the member nominates who should receive their benefits in the fund in the event of death.
One of the main areas of confusion is whether the BDBN should nominate the death benefit dependants directly (so that the superannuation bypasses the will) or if the BDBN should nominate that the benefits pass to the legal personal representative for distribution under the will (important note: do not nominate the ‘estate’, the correct terminology is ‘legal personal representative’).
There is also a popular view that a BDBN is critical for a comprehensive estate plan, and while I agree that in some circumstances a BDBN can be of vital importance, I don’t share the view that a BDBN is always necessary. Sometimes proactively doing nothing (i.e. leaving the decision with the trustee of the super fund) can be the best approach.
Set out below are some general guidelines for when to use a BDBN, who to nominate, and when to leave the decision with the discretion of the trustee:
Superannuation is held via a public offer fund (i.e. no self managed superannuation fund aka SMSF)
A BDBN is essential for obtaining certainty about where superannuation benefits will pass where there is a public offer fund. The critical question for members in public offer funds is deciding whether to pass their benefits directly to death benefit dependants (i.e. spouses, children or financial dependants) or the legal personal representative.
A BDBN nominating the legal personal representative, so that the superannuation benefits are distributed under the will, is often appropriate where:
- The superannuation benefits should be held via a testamentary trust environment, in order to access the tax and asset protection advantages (and stay tuned for a post about superannuation proceeds trusts and ensuring that tax death benefit dependants can still receive the super tax free via the testamentary trust)
- Under the will, there can be several clauses nominating where the estate passes depending on certain contingencies, however most BDBN forms provided by public offer funds do not allow for this level of robust planning – nominating the legal personal representative can therefore ensure that the superannuation benefits pass to different recipients based on specific contingencies
- There is no or minimal risk of a family provision application against the estate
- There are no death benefit dependants who are eligible to receive a nomination directly from the superannuation fund
A BDBN nominating the death benefit dependants directly, so that the superannuation bypasses the will, is often appropriate where:
- There is risk of a family provision application against the estate (although in NSW this is likely to be less effective due to the notional estate rules)
- The will does not include a testamentary trust or there is no advantage of diverting the benefits via a testamentary trust
- The nominated beneficiary wants to receive the benefits as quickly as possible and the will leaves the estate to that beneficiary directly.
Superannuation is held via a SMSF
Where the clients have a SMSF, they have the additional option of proactively making no BDBN and leaving the decision of where to pass their benefits with the trustee of the SMSF.
The following considerations are often relevant when deciding whether it is appropriate to leave the decision to the discretion of the trustee:
- the control of the fund passes to an appropriate trustee on the member’s death (often the executors of the deceased member) – this can often be problematic where there are blended families
- the member trusts the trustee to implement their objectives and obtain appropriate advice at the relevant time about the appropriate recipient of their superannuation benefits
- the SMSF has liquidity issues due to real property assets and gearing
- flexibility for the trustee to obtain advice after the member’s death about the superannuation laws, tax position and beneficiaries’ needs is more important than certainty
- where there is risk of a family provision application against the estate and there are appropriate trustees of the SMSF, they can defer making the decision of whether to pay the super benefits into the estate (and to the benefit of a testamentary trust established in the will) or directly to a death benefit dependant (to reduce the pool of assets available to satisfy a challenge) based on the circumstances after death and whether the executors believe it is likely that a challenge will be brought against the estate. The effectiveness of this strategy needs to be considered in light of the different time periods for bringing a family provision application challenge in the various states and the responsibility of the trustee to pay the benefits within 6 months of the date of death. Again, this is also less effective in NSW
If it is determined that a BDBN should be made, then the above considerations in relation to whether to nominate the legal personal representative or the death benefit dependants directly also apply to a SMSF.
As always, there is no one rule that can be applied to every circumstance, but hopefully the above summary assists when guiding clients with the decision of whether or not to make a BDBN.