Increasingly a large percentage of Australians assets are held in superannuation funds. What happens to those funds on the death of a member is much misunderstood. A superannuation death benefit is a payment from a superannuation fund after the death of a member.

A member’s interest in a superannuation fund does not automatically form part of their estate. The payment of a death benefit is generally a matter of trustee discretion even if a beneficiary was noted when the superannuation fund was first established as indication of preference as this is normally non-binding.

However a member has the power (subject to the governing rules of the superannuation fund) to provide the trustee of the fund with a nomination as to the payment of death benefits from the superannuation fund; this is known as a Binding Death Benefit Nomination (BDBN). The advantage of using a BDBN is that death benefits can be directed to a particular beneficiary, usually to a dependant so that the payment is tax free. A BDBN also provides certainty as to who will receive a member’s benefits on their death. But there are some technical requirements for a BDBN to be effective.

A death benefit from a superannuation fund can be paid either:

  1. directly to a beneficiary, who must be a dependant; or
  2. to the member’s legal representative e.g. the executor of the deceased’s estate

Who is a dependant?

Many members fail to understand who constitutes a “dependant”.

A dependant includes:

  • the deceased member’s spouse or former spouse, which includes a de facto spouse (of the opposite or same sex);
  • the deceased member’s child (which includes an adopted child, step child or an ex nuptial child of the member or their spouse), provided that at the time of death the child is under the age of 18;
  • a person who had an interdependency relationship with the deceased member immediately before the member’s death;
  • a person who was financially dependent on the member at the time of the member’s death

What is an interdependency relationship?

Two persons (whether or not related) have an interdependency relationship if:

(a)  they have a close personal relationship; and

(b)  they live together; and

(c)  one or each of them provides the other with financial support; and

(d)  one or each of them provides the other with domestic support and personal care.

In addition, two persons (whether or not related) also have an interdependency relationship if:

(a)  they have a close relationship; and

(b)  they do not satisfy one or more of the requirements mentioned in paragraphs (b), (c) and (d) above; and

(c)  the reason they do not satisfy those requirements is that either or both of them suffer from a physical, intellectual or psychiatric disability.

Binding Death Benefit Nominations – Technical requirements

Section 59(1A) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) requires compliance with regulation 6.17A of the Superannuation Industry (Supervision) Regulations 1994 (SIS Regulations). The BDBN must:

  • be signed and dated by the member;
  • be witnessed by two individuals over the age of 18 not mentioned in the BDBN;
  • only nominate beneficiaries who are either dependants or the legal personal representative of the member; and
  • be renewed every 3 years.

The BDBN must specify the proportion of the benefit to be paid to each nominated beneficiary. The maximum term that an unchanged BDBN can remain in effect is 3 years.

A BDBN is entirely separate and distinct from a member’s will. The payment of death benefits from a superannuation fund is determined in accordance with the governing rules of the superannuation fund and not in accordance with the terms of a member’s will. However if the proceeds of superannuation are paid to a member’s estate because of a BDBN or at the trustee’s discretion in the absence of a BDBN the superannuation funds will form part of the deceased member’s estate and be distributed in accordance with the terms of the deceased member’s will not any nomination made when the superannuation fund was established. So it is important for a will maker to consider how any superannuation funds that fall into the estate are to be dealt with.

Trustees should periodically:

  • Review the BDBN to take into consideration any changes to members’ circumstances. For instance a BDBN is not automatically revoked when the member separates or divorces from his or her spouse. Also, where a nominee has predeceased the member and the member has not changed the BDBN, the BDBN will not automatically be revoked.
  • Ensure that they alert the member when the BDBN has lapsed after 3 years so that the member can sign a new one.

Members should also regularly review their BDBN at least every 3 years. If a member dies without updating the BDBN to reflect their circumstances before he or she died, the trustee will be bound (subject to the governing rules of the superannuation fund) to follow the BDBN regardless of whether it is appropriate.

Self Managed Superannuation Funds (SMSFs)

The requirements under section 59(1A) and regulation 6.17A do not apply to SMSFs. This means that 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 regulation 6.17A. For example, the governing rules of a member’s SMSF may not have a time restriction on a valid BDBN. However the BDBN must nominate a person who can receive a benefit in accordance with the standards as set out above.

For more information contact partners@pigott.com.au.

This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.

Prepared by Owen Ratner and Prerna Sundarjee