Binding Death Nominations

• December 2004

What is a Binding Death Nomination?

Under Section 62 of the Superannuation Industry (Supervision) Act 1993 (SIS) a regulated superannuation fund is required to be maintained solely for specific purposes. One of those purposes is the provision of death benefits in respect of each member of the fund if the benefits are provided to the member's legal representative and/or the members' dependants (Section 62(1)(a)(iv))

The Superannuation Legislation Amendment Act 1999 changed existing legislation to provide that fund rules can permit a member’s death benefit nomination to be binding on the trustee.

Some public sector funds have had binding nominations for many years outside of the SIS Act - due to state government policy for example – however most super funds were only able to offer binding nominations as a result of an amendment to the SIS Act in mid-1999.

Unfortunately many funds have been slow or unwilling to amend their rule’s to allow for the changes. For instance REST (Retail super) decided against inclusion of Death Nominations claiming it was not cost effective due to the requirements to contact members in order to update their nominations. The trend may be changing however, as research shows many funds now have this option (i.e. Unisuper (Higher education sector), Mapfund (health Professionals), ANZ, NAB etc.)

A Binding Death Nomination provides greater certainty about who will receive a death benefit in the event of a death. It is a legal instrument that obliges (or “binds”) the Trustee of the Superannuation fund to pay the death benefit to the person or persons nominated in a Binding Death Nomination Form as the beneficiary/ies. If the death benefit is to be paid to more than one beneficiary, it must also be paid in the proportions nominated in the form.

What happens without a Death Nomination?

Other than a Binding Death Nomination, there are two options:

  1. No nomination – If no nomination is made, the trustee is bound to deal with the benefit in the best interests of the member. When deciding on payment at the death of the member the trustee will typically enquire about the deceased’s family situation, inter-dependants, the provisions in the will, etc before making a decision. The benefit must be paid to the deceased’s dependents or their legal representative (defined below.)
  2. Non-binding nomination – Until the 1999 legislative changes, all nominations were of this type. The trustee handles these in much the same way as it has in the past, using the nomination as guidance in reaching a decision.

A binding nomination takes away the trustee’s discretion.

Who can be nominated?

You can only nominate a dependent or your legal personal representative.

Legal personal representative is defined as (Section 10): the executor or administer of the estate of the deceased person, the trustee of the estate of a person under a legal disability or a person who holds an enduring power of attorney granted by a person.

Definition of dependent (Section 10): At 30 June 2004, the Superannuation Legislation Amendment (Choice of Superannuation Funds) Act repealed the old definition of dependant in both superannuation and taxation law and replaced it with one that includes the term ‘interdependency relationship’.

Individuals previously defined as a dependant (a spouse, former spouse under tax legislation, and a child under 18) continue to be included under the new definition of persons in an interdependency relationship.

An interdependency relationship between two people exists if (Section 10A):

  • they have a close personal relationship;
  • they live together;
  • one or each of them provides the other with financial support; AND
  • one or each of them provides the other with domestic support and personal care.

Therefore, interdependency now also includes:

  • same sex partners; or
  • two elderly siblings that reside together; or
  • an adult child who resides with and cares for an elderly parent.

In some circumstances, where due to a physical, intellectual or psychiatric disability, all of the above conditions cannot be met, an interdependent relationship may still exist.

If someone is nominated who is not covered under the definition of interdependency relationship or your legal personal representative, the trustee cannot pay the benefit to that
person. The trustee can only pay death benefits to your beneficiaries as defined under the law or to the personal legal representative of your estate.

You may nominate as many beneficiaries as you wish (or the individual funds rules allow).

An important restriction is that a Binding Death Nomination is only valid for three years from the date it is signed.

Summary of the Requirements for a Binding Nomination

The legislation is quite specific on the requirements for a binding nomination to be legally effective.

  1. The beneficiaries must be a dependent, in an interdependent relationship or legal personal representative.
  2. The proportions for payment must be certain. All details are provided and allocations clear.
  3. Nominations must be in writing, signed and dated by you in the presence of two witnesses who are at least 18 and are not beneficiaries. The declaration must contain a declaration signed and dated by the witnesses stating that you signed the notice in their presence.
  4. Nominations must be renewed at least every three years. A Fund may treat a lapsed binding nomination as diverting to a non-binding nomination (Mapfund), or the trustee may identify all your dependants and pay the death benefit to them, in proportions determined by the trustee (Unisuper).
  5. The fund has a duty to seek clarification if the nomination is not clear.
  6. If a binding death benefit nomination is made, the annual member report should include information about the nomination and its effect.
  7. Nominations can be confirmed by giving the trustee a written notice to that effect which is signed and dated. Alternatively, notices can be amended or revoked at any time by giving the trustee a notice which is signed and witnessed in the same way as the initial notice (see point 3).

Advantages and Disadvantages of Binding nominations

Advantages

The greatest appeal of Binding Death nominations is their potential to allow members to protect their death benefit from disputes.

Example
Bob and Jill had 4 children. Between them, Bob and Jill had $2 million in a SMSF. Three months ago, their eldest son, Malcolm, asked his parents if he could join their SMSF. Their Adviser told them that to comply with Superannuation legislation, Malcolm had to become a Trustee of the SMSF if he was to become a Member.

Last month, Bob and Jill spontaneously combusted.

Malcolm was nominated as the Executor of Bob and Jill's Wills. Bob and Jill had nominated their four children as beneficiaries of their super upon their death.

The sole surviving Trustee of the SMSF, Malcolm, was not communicating with his brothers and sisters, and had developed a taste for the high life. Without a Binding Nomination, a Trustee has absolute discretion in distributing death benefits from the Super Fund.

Malcolm had a free reign over who got Mum and Dad's Super, and how much of it.

He exercised his discretion as the Trustee and the Executor of his parents' Wills to pay out the $2 million to himself. He bought himself a new red Ferrari and drove off into the sunset. His siblings were unable to stop him.

Binding nominations also have some significant estate planning potential. For example, there may be tax advantages in ensuring that your superannuation is paid to an infant child and other assets bequeathed to an adult child.

Under the Income Tax Assessment Act 1936 (ITAA), death benefits received by a dependant are tax free up to the threshold of the deceased person's pension Reasonable Benefit Limit (RBL), which is $1,238,440 in the 2004-05 financial year. Any benefit above the RBL would be taxed at the highest marginal income tax rate, plus Medicare levy.

The Commissioner has a discretion to reduce the amount of tax payable from the estate of a deceased fund member by that amount which is going to be paid to a 'dependant'.

If the payment is taken to be paid to a non-dependant, the benefit is taxed as an ordinary eligible termination payment (ETP).

Disadvantages

The main disadvantage is the inability of the trustee to rectify the situation where the member has not kept the nomination up to date. For example, the family situation may have been altered due to births, deaths, children becoming independent, re-marriage, etc. If the member is unlikely to keep the nomination up to date, a non-binding nomination allows the trustee to consider these factors in deciding how the death benefit should be paid and is more appropriate.

The safeguards preventing the trustee from dealing with the benefit in an inappropriate manner are extremely rigorous. (As long as it is not a self-managed fund where the trustee may also be a beneficiary. Like the above example.)

The taxation consequences of superannuation payments due to death can be complex. An improperly thought out binding nomination may have costly tax consequences. Detailed Legal and Taxation advice is recommended before determining a course of action.

Case Studies

The following case studies are extracted from an article entitled ‘Binding Death Nominations - Too Many Strings Attached?’ appearing on the Australian Superfunds website.

These relevant cases deal with Funds that have amended their rules to allow for Binding Death Nominations.

Case study 1: Queensland Coal & Oil Shale Mining Industry Super - QCOS - decided to offer binding nominations in the interests of members, in order to give them certainty about their benefits, says general manager Ian Harcla.

Since QCOS launched the binding option with its year 2000 member statements, 10-20 per cent of members have returned nomination forms and the fund has had one binding death benefit claim. "We have a number (of death payments) that have gone to the SCT and thought if members put in place binding nominations it might reduce down the number of resources we use in dealing with complaints to the SCT," he says.

Speaking from experience, Harcla says he's not surprised funds have shied away from the system, given the level of administration required. Binding nominations are fairly resource intensive, he says. After publicising the option amongst members, QCOS had around 1000 forms come in of which a "material number" had to be sent back." I think one of the issues was the complexity of the form which you have to have for this might be a bit difficult for members to comprehend." In spite of the problems, Harcla says he thinks members' financial advisers and estate advisers are already looking for binding death nomination facilities. He had a few advisers phone him inquiring about the binding facility early last year.

Case study 2: Macquarie Bank introduced binding nominations across its superannuation products around 18 months ago. Macquarie's technical services division director, David Shirlow says that from an estate planning point of view, binding nominations are the only means to give members certainty in co-ordinating allocation of assets within their estate and ensuring they get the best tax result. Macquarie offers the facility for member benefits to be bequeathed as pensions to beneficiaries under the age of 18.

"This is particularly useful where there are very large benefits," Shirlow says. "They can avoid breaching RBLs and having an excess benefit situation."

Case study 3: Ludwig Bachmayer, product development manager with Statewide Super, which introduced a binding death nomination option on its allocated pension product last year, says demand for binding nominations can depend on fund clientele.

"If you have a lot of high net worth individuals that may have complex financial planning advice you can see there may be a need for binding death nominations there."

Around 15 per cent of allocated pension customers have opted for binding nominations since they became available last year. Statewide Super is now considering whether to introduce the facility for its super fund members.

"The whole thing really has whiskers on it," Bachmayer says. "Some legal advisers are advising clients to stay away from it because it hasn't been tested yet and they may not have the systems in place to deal with it."

Summary

The maintenance obligations necessary, should this approach be taken, is an essential part of the decision.

The apparent benefits of a Binding Death Nomination must be complemented by a suitable management and review system, regularly audited by the chosen Taxation, Legal or Financial adviser.

Should you wish to discuss this area in more detail please do not hesitate to contact us.

This publication contains general information only. It is not provided as legal advice. Professional advice should be taken before any course of action is pursued or any information herein relied upon.