In last month’s article (available here) we explained “binding death benefit nominations” (or “BDBNs”) for SMSFs. Just a reminder – it’s a set of instructions you can give about how you’d like your super dealt with if you die. And as the name suggests, the trustee is legally bound to follow instructions given via a BDBN as long as it’s done correctly.
But it’s not essential to have a BDBN and in fact many SMSF members don’t have one. What happens under those circumstances?
This is not the same as dying without a Will. Even if you don’t have a BDBN, there are some important features of superannuation funds that limit who can get your money and control who makes the decisions.
For a start, superannuation funds have trustees (or directors of the company that is the trustee) who are in charge of what happens to all the money in the fund. If there is no BDBN (or any other kind of binding instruction – more on this later), whenever any member dies, the trustee chooses who gets the super. And they have a very short list of people to choose from – it can’t be paid to just anyone. If you die, the list generally includes : your spouse, your children (of any age), anyone who is financially dependent on you and your estate. It can also be paid to someone with whom you’re in an “interdependency relationship” but this is pretty rare – it generally only happens if you live with someone and have a close personal relationship, you care for each other and have some kind of financial link in that you share costs etc. Your super can only be paid to someone outside this group of people (for example, a parent or sibling) if you don’t have any of these people and no estate is formed on your death (for example, if you died without a will and didn’t have any other assets).
So what might this mean in practice if you and your spouse are the only members and directors (or trustees) of your SMSF?
For a start, in most cases, when you die your spouse will initially be the sole director or individual trustee of your fund.
That means that for at least a short term after you’ve died, he or she has control over what happens next with your super. If your intention was to leave all your super to your spouse anyway, this puts them in a perfect position to decide what to do. But if you had other beneficiaries who thought they too deserved some of your super (eg your children), your spouse may need specialist legal advice to make sure he or she exercises the special powers they have in the right way to remove the risk of their decision being challenged.
It might be necessary or desirable to have another trustee or director appointed to run your fund with your spouse over the longer term. Who has the power to do that (and choose who it is) will depend on documents like your fund’s trust deed and if your trustee is a company, the constitution of that company and who owns the shares. Some of this will probably come back to your Will - who will inherit your shares in the trustee company? Who is your executor?
If you are the only member and trustee (or director of the trustee company) of your fund, then your Will becomes even more important. Often, your executor will hold all the power in at least the immediate period after your death. That means they have a lot of control over what happens to your super – but again, only within the constraints mentioned earlier in terms of the list of people who can receive it.
So not having a BDBN doesn’t mean there is a risk that there will be no-one representing your interests when it comes to deciding what happens to your super. It’s quite different to the situation where your super is in a public fund, for example. In that case, it’s often much safer to have a BDBN – the trustee of that fund doesn’t know anything about you and so it’s helpful to tell them exactly how you want your super dealt with.
In an SMSF there can even be some benefits to not having a BDBN.
For example, you might think you want all your super to go to your spouse – after all, that’s what your Will might say about all your other assets. But possibly what you really mean is that you want your spouse to control it. In fact what might work best for your spouse is to leave some of your super in the SMSF (and use it to pay a pension to him or her) but pay the rest to your estate. That might be attractive if your Will sends the money to useful tax structures like testamentary trusts etc. By having the super paid to your estate, your spouse might still have complete control (if he or she controls the testamentary trust) but much better tax planning opportunities.
Similarly, you might think you want your super to go to your children. But actually depending on a host of factors (how old they are, whether they are still dependent on you, whether or not you have a spouse), that might not end up being the best approach for your family from a tax perspective. It’s sometimes difficult to predict these perfectly in advance.
Finally, if your super is providing a pension, it’s worth checking the documentation completed when you first set it up. One of the things people often do with pensions is make them “reversionary” (which means they automatically continue to someone on your death – usually your spouse). If your BDBN says that your super is to go to your estate, the two will contradict each other and pension instructions may actually override your BDBN or vice versa (which one “wins” depends on what your trust deed says).
These, and some other pitfalls of BDBNs are discussed in more detail in our article here.
To be fair, all of these examples are really describing situations where the BDBN either said the wrong thing or conflicted with other important documents. They’re not highlighting inherent problems with BDBNs generally. If you are happy to stay vigilant and make sure you consider your BDBN just as carefully are you would your Will, as well as regularly reviewing it to make sure you’re keeping up to date with changes in super rules, your personal circumstances, the size of your balance (which might impact who should get your super and how it should be paid) etc, there’s no reason you couldn’t get the right outcome using a BDBN.
And BDBNs can be great for providing certainty when you have quite a simple instruction. For example, if you’ve got a carefully considered Will that clearly indicates where your money should go, your children are financially independent adults and you have no spouse, a simple BDBN directing all your super to your estate is likely to be perfect.