If you assumed that your superannuation death benefits are automatically gifted to your loved ones under your will, you wouldn’t be alone.  However, it’s actually more complicated than that. 

If you want to control where your superannuation death benefits go on your death, you need to make a binding death benefit nomination (also known as a BDBN).

The BDBN tells the people in charge of your superannuation fund (the legal term is ‘Trustee’) where to pay your benefits if you die.

Who can you nominate in your BDBN to receive your superannuation death benefits?

There are rules about who can be nominated in your BDBN to receive your superannuation death benefits:

If you are nominating someone who is a financial dependant or in an interdependent relationship with you, it’s important you get advice from your lawyer or financial adviser because there are strict tests that must be satisfied.

How does a BDBN relate to my Will?

A BDBN is sometimes described as a Will for your superannuation. 

If you choose to nominate a loved one in your BDBN to receive your superannuation death benefits, then your superannuation death benefits (and any life insurance in your superannuation fund) will be paid directly to them from the superannuation fund.  Any direction you leave in your Will to gift your superannuation death benefits will be irrelevant.

If you nominate your ‘legal personal representative’ in your BDBN, then the superannuation fund will pay your superannuation death benefits to the executor of your estate, and then the executor will have to gift your superannuation death benefits in accordance with your Will.

This can be a sensible option if:

• you want to leave your superannuation to someone who is not eligible to be nominated directly in your BDBN; or
• you are including one or more testamentary trusts in your Will.

The BDBN serves as a ‘bridge’ between your superannuation and your Will.

It’s important to obtain advice from your lawyer and financial adviser about the appropriate recipients for your superannuation death benefits, as there can be complex tax, estate planning and social security considerations when making this decision.  

How long does a BDBN last?

Your superannuation fund must follow your BDBN and pay your superannuation death benefits where you have directed, but only for as long as your BDBN remains valid. 

If you die without a valid BDBN then your superannuation fund can choose where they pay your superannuation death benefits.

Most BDBNs will only last for 3 years and need to be renewed every 3 years (referred to as ‘lapsing’).

Some BDBNs last forever until you die or change them (referred to as ‘non-lapsing’).

When making a BDBN, it is essential that you check whether your BDBN is lapsing or non-lapsing.

If you have a lapsing BDBN, it’s important that you update it every 3 years as it will no longer bind your superannuation fund when the 3 years is over.

If you have a reversionary pension in place, it’s important you get specific advice from your lawyer or financial adviser because the BDBN may not be effective until after both you and the reversionary pensioner have died.

Advantages of a BDBN

The main advantages of making a BDBN are:

• certainty that your chosen loved ones will receive your superannuation death benefits if you die;
  • superannuation death benefits paid directly to a beneficiary in accordance with a BDBN don’t form part of your estate and therefore aren’t subject to claims challenging your Will; and
  • your superannuation death benefits may be paid to your loved ones faster than if you leave it up to the Trustee of your SMSF to decide, or pay them to your estate.

Disadvantages of a BDBN

The disadvantages of making a BDBN include:

• the complexity of ensuring your BDBN is validly made. There are many cases where small issues have affected the validity of a BDBN;
  • just like your Will, you need to review your BDBN regularly and ensure it stays appropriate for your changing circumstances; and
  • it reduces flexibility for the trustee to take into account any changes in circumstances for you or your loved ones, minimising opportunities to take advantage of tax, asset protection and estate planning strategies available at your death.

If you have any questions about making a BDBN, please contact us to book an estate planning conference.