A Binding Death Benefit Nomination within an SMSF is a document provided by a member to the Trustee of the Fund.
This document details how the member would like their member benefits paid to beneficiaries in the event of their death.
One important point to note is: The distribution of your superannuation balance to beneficiaries in the event of your death is not determined by your Will.
The Binding Death Benefit Nomination may stipulate the proportions of benefits paid to each beneficiary and/or the form in which the benefit should be paid (Lump Sum/ Income Stream/ Combination)
A Binding Death Benefit Nomination is ‘Binding’ on the Trustee and requires the Trustee to pay benefits in accordance with the nomination with no room for discretion.
Your first step is to ENSURE THE TRUST DEED OF THE SMSF PERMITS BINDING NOMINATIONS.
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Benefits of a Binding Death Benefit Nomination (SMSF)
The main benefits of a BDBN are:
- Provides certainty for members as to who will receive their superannuation benefits in the event of their death.
- Can be used in conjunction with a person’s Will to form an effective Estate Plan.
- Can deal with the distribution of insurance benefits for policies owned within the SMSF.
Risk of a Binding Death Benefit Nomination (SMSF)
The main risks of a BDBN are:
- If it is not reviewed regularly, a Binding Death Benefit Nomination may result in benefits being paid to unintended beneficiaries.
- A Binding Death Benefit Nomination provides no flexibility at the time of death in regard to current legislation or family circumstances.
- A Binding Death Benefit Nomination does not affect a reversionary pension.
Alternatives to a Binding Death Benefit Nomination (SMSF)
The main alternative to a Binding Death Benefit Nomination is a Non-Binding Death Benefit Nomination.
A Non-Binding Nomination provides the Trustee of the SMSF with the members preference on how they would like their assets distributed; however ultimate discretion remains with the Trustee.
This allows the Trustee to take into account the member’s situation and relationships at the time of their death to determine whether it is consistent with the Death Benefit Nomination.
A Non-Binding Death Benefit Nomination can be beneficial in instances where the member has not reviewed their Nomination after a significant change to their personal or financial circumstances.
Another alternative is to commence a reversionary income stream; whereby the pension automatically reverts to the reversionary beneficiary upon death.
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What Happens if I have no Death Benefit Nomination?
If a member has not put in place a Death Benefit Nomination, the Trustee and/or Legal Personal Representative (LPR) of the deceased will assess the deceased members relationships and circumstances at the time of death and pay benefits out accordingly. The risk of this is that death benefits may not be paid in accordance with the deceased’s wishes and payment of benefits may take longer, as the Trustee will need to ensure that the Death Benefit is being paid out to the correct beneficiaries.
Sometimes, if no Death Benefit Nomination has been made, the Trustee will pay all benefits to the deceased’s Estate. This then allows the benefits to be paid out in accordance with the deceased member’s Will.
SMSF Binding Death Benefit Nomination Expiry
A Binding Nomination within an ordinary superannuation account, such as a retail fund or industry fund, will only be valid for 3 years, at which stage a new Binding Nomination will need to be submitted to the Trustee.
However, a Binding Death Benefit Nomination within a SMSF is exempt from the 3-Year rule and should remain valid until it is revoked or altered by the member, unless the Trust Deed suggests otherwise.
If you would like to know the tax rates on superannuation death benefits, please refer to this article.
If you would like anything clarified or have any further questions about SMSF Binding Death Benefit Nominations or any other topics, please do not hesitate to leave a comment in the section below .