YOUR ULTIMATE DEADLINE What happens to my superannuation when I die? SEPL s death benefits guide

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1 YOUR ULTIMATE DEADLINE What happens to my superannuation when I die? SEPL s death benefits guide KNOWLEDGE + INNOVATION + SKILL = SOLUTIONS DON T RISK MISSING YOUR ULTIMATE DEADLINE 0

2 Table of contents 1. What happens to your superannuation when you die? 1 2. Who decides who receives your superannuation when you die? 2 3. What if there is a dispute about the payment of your superannuation? 3 4. What is a non binding death benefits nomination? 5 5. What is a binding death benefits nomination? 6 6. Does your superannuation form part of your estate when you die? What role does a member s will play in controlling who gets their superannuation? Must you have a binding death benefits nomination? Should you leave a binding death benefits nomination? When might a binding death benefits nomination be appropriate? Things to check before using a binding death benefits nomination? What is a reversionary pension? Why have a reversionary pension? What are the limitations of a reversionary pension? What happens if there are conflicting death benefits nominations and/or reversionary pension nominations? Can a nominated beneficiary renounce a nomination in their favour? Can you protect your death benefits without a binding nomination? In what form can your death benefits be paid when you die? When must the death benefits be paid? Must the death benefits be paid out of the fund? How will your death benefits be taxed when you die? What does the case law tell us about death benefits nominations? What do the 1 July 2017 superannuation changes mean for death benefits? What essential superannuation death benefit laws did not change on 1 July 2017? What essential laws changed on 1 July 2017 that impacts on death benefits? How did Sydney Estate Planning Lawyers normally think about superannuation death benefits before 1 July 2017? Why does the transfer balance cap change Sydney Estate Planning Lawyers pre 1 July 2017 thinking about death benefits? Let s look at examples to see what the transfer balance cap means for death benefits! What rules can we now use for death benefit management after 30 June 2017? Case law and death benefits - Donovan v Donovan [2009] QSC Case law and death benefits - Wooster v Morris [2013] VSC Case law and death benefits - Ioppolo & Hesford v Conti [2013] WASC Case law and death benefits - Munro & Another v Munro & Another [2015] QSC Case law and death benefits - McIntosh v McIntosh [2014] QSC 99 & Brine v Carter [2015] SASC Sydney Estate Planning Lawyers

3 1. What happens to your superannuation when you die? 1.1 Your superannuation balance might be a significant asset when you die and so it should be carefully considered in your estate planning. 1.2 This is particularly important because it will not automatically: be controlled by your will; or form part of your estate. 1.3 In this document, your superannuation balance when you die is called your death benefits. 1.4 Normally your death benefits will be made up from: contributions to your superannuation fund by or on your behalf; investment earnings on those contributions; any life insurance policy proceeds paid because of your death or prior disability. 1.5 When you die, your death benefits can only be paid to your: superannuation dependants (and this term has the meaning below); and/or the legal personal representative (of your estate), See regulation 6.22(1) **unless you have no superannuation dependants and you have no legal personal representative as no application is made for a grant of probate or letters of administration of your estate on your death. ** See regulation 6.22 of SIS - if the trustee has not, after making reasonable enquiries, found either a superannuation dependant or a legal personal representative, the death benefits may be cashed in favour of an individual. 1.6 Under superannuation law, your superannuation dependants are: (d) your spouse (this includes de facto and same sex spouses); your children (regardless of their age - age only becomes relevant when determining how much tax to pay on the death benefits); your spouse s children (regardless of their age - age only becomes relevant when determining how much tax to pay on the death benefits); anyone who is genuinely dependant on you in the ordinary sense (for example someone who relies on you for financial support); Sydney Estate Planning Lawyers Page 1

4 (e) anyone with whom you may have an **interdependency relationship. **This also has a special meaning. It generally includes: (iii) someone you live with (other than a spouse or child); and with whom you have a close personal relationship; and where one or both of you provides the other with financial support, domestic support and personal care. Advice should be taken before relying on this definition of a superannuation dependant. See section 10 of SIS 1.7 Your death benefits can be paid to: one or more of your superannuation dependants; your legal personal representative; or 1.8 Your death benefits can be divided up between: both of them in whole or in part; or a number of either or both of them. See regulation 6.21 of SIS 1.9 However, your death benefits cannot be paid to anyone other than: your superannuation dependants; and/or your legal personal representative, unless you have no superannuation dependants and you have no legal personal representative because no application is made for a grant of probate or letters of administration of your estate on your death. 2. Who decides who receives your superannuation when you die? 2.1 A superannuation fund is a trust and like any other trust, it is controlled by its trustee. 2.2 The trustee must act as required by: the law; and the terms and conditions of the trust deed. Sydney Estate Planning Lawyers Page 2

5 2.3 When you die, the default position is that, without something more, subject to: the law; and the trust deed, the trustee has absolute discretion as to who receives your death benefits. 2.4 Importantly, your death benefits: do not form part of your estate; and are not normally controlled by your will: unless: (d) the trustee decides to pay your death benefits to your legal personal representative; and/or unusually but possibly, the trust deed of the superannuation fund is worded in a way that allows your will to control / nominate who gets your death benefits. 2.5 If your death benefits are paid to your legal personal representative, they will then be dealt with under your will by: either a specific provision in your will that gifts those death benefits; or as part of the rest and residue of your estate, your death benefits will pass to whoever you give the rest and residue of your estate. 3. What if there is a dispute about the payment of your superannuation? 3.1 If your death benefits are the subject of a dispute: if your superannuation is in a SMSF, a court will be required to consider what is to happen with your death benefits in deciding: (iii) who they are paid to; and how much they are paid; and in what form they will be paid. This is because disputes about those sorts of things in a SMSF are not part of the Superannuation Complaints Tribunal authority to determine and so, they must be determined by a court. if your superannuation is not in a SMSF, the Superannuation Complaints Tribunal has authority to determine those same things. 3.2 There is no guarantee that the dispute will be resolved in a way that you would have wanted. Sydney Estate Planning Lawyers Page 3

6 3.3 So consideration may need to be given to how you can create certainty about who is to receive your death benefits when you die. 3.4 Depending on the terms and conditions of the trust deed and whether the fund is a SMSF or not, there are some steps you can take to: either guide; or direct the trustee, on how your death benefits are to be dealt with. 3.5 You can put in place: a non binding death benefits nomination (only a guide to the trustee); a binding death benefits nomination (a binding direction on the trustee); a reversionary pension (a binding direction on the trustee); (d) a combination of all 3. See the commentary below about each of these things. 3.6 There is no legal requirement to do any of these things. 3.7 It is entirely legitimate to: say nothing to the trustee about how you would like your death benefits to be paid on your death; and simply leave the trustee to exercise its discretion at the time. 3.8 If on a member s death there is any doubt about: the effect or validity and the enforcement of a death benefits nomination; and what the trustee of the superannuation fund should do, consideration should be given to the trustee seeking a court determination about what is the correct thing to do. In this way, the trustee s personal liability (or that of a director of the corporate trustee) is removed. See the case of Wooster v Morris [2013] VSC 594 See annexure 4 page 42 Sydney Estate Planning Lawyers Page 4

7 4. What is a non binding death benefits nomination? 4.1 A non binding death benefits nomination is a nomination made by a member about their death benefits that is not binding on the trustee. 4.2 It will not be binding on the trustee: because the trust deed specifically provides that it will not be binding; or because it has not been made in compliance with the requirements of the SMSF trust deed or the statutory requirements to allow it to be a binding nomination and so by default, it is not binding. 4.3 Even if the trust deed does not specifically provide for a non binding nomination, a superannuation fund member can still give the trustee a non binding nomination about their death benefits. That is why this is only a guide to the trustee. 4.4 This could be as simple as a letter or a minute which sets out the member s preference about the payment of their death benefits on their death. 4.5 It may also be in a form provided for in the trust deed. 4.6 But whatever form it takes, it will not be binding on the trustee. 4.7 Sometimes, a trust deed s nomination provisions will not comply with the statutory requirements for a binding death benefits nomination. So don t be misled by false headings about binding nominations, as the only way in which it will be binding is: if the trust deed specifically allows for it to be binding in accordance with the superannuation law; and the nomination is made as required by the trust deed and the applicable superannuation law. 4.8 A non binding death benefits nomination can relate to all or part of your death benefits. 4.9 Non binding death benefits nominations are quite common in SMSF s. This is because the trustee of the fund (after the member s death) is often other family members who are effectively making decisions about their own inheritance A non binding nomination (or even no nomination at all) leaves the family members scope to make whatever decisions are best (for example, most tax effective) for the family as a whole However, by not making a binding nomination of some form, the deceased superannuation fund member is trusting that their death benefits will be paid: in the way that they want; and without disputes between family members. Sydney Estate Planning Lawyers Page 5

8 5. What is a binding death benefits nomination? 5.1 The law allows a superannuation fund member to issue the trustee with binding instructions about what is to happen with the death benefits, normally called a binding death benefits nomination. So it is a legally enforceable direction to the trustee and not just a guide. See section 59 of SIS See regulation 6.17A of SIS See SMSFD 2008/3 (although, this is not binding on a court) 5.2 This is only the case if the trust deed specifically allows for a superannuation fund member to give nominations that are binding on the trustee. 5.3 If a superannuation fund member makes a binding nomination, the trustee is legally required to follow it unless: doing so would breach superannuation law (for example, the nomination was to a non superannuation dependant or not to the deceased member s legal personal representative); or under the deed or in any event, the nominated superannuation dependant may renounce the nomination. 5.4 This applies even if: your circumstances have changed since you provided your binding death benefits nomination; and your original instructions no longer provide the best result for your family. 5.5 So once you have made a nomination, you should check it regularly to make sure: that the reasons you made it still apply; and that no changes are required to it. Each year when you do your tax is a good time for this to happen. If changes are required, ensure that: the existing nomination is correctly revoked; there is evidence of that; and those that matter, know (for example, your executors, your intended beneficiaries of your estate, your lawyer, your accountant). Sydney Estate Planning Lawyers Page 6

9 5.6 You can make a binding death benefits nomination in any way you want as long as: (d) it is in writing; and it complies with the terms and conditions of your trust deed; and it complies with the law; and the nomination is in favour of: a superannuation dependant; or your legal personal representative. 5.7 Depending on the terms and conditions of the trust deed, this may require a copy of the notice to be given to the trustee. It may also require some other condition to be satisfied. So READ THE DEED. 5.8 Whatever is required by the terms and conditions of the trust deed, you must ensure that: you comply with it to the letter; and you can prove compliance (including by leaving a copy of that proof with your estate planning records, your executors, lawyer and accountant). [For example, if a copy is required to be given to the trustee, you have a copy of a letter sending it to the trustee at the correct address for the service on the trustee as required under the trust deed and that the service is done as permitted by law and/or the trust deed.] 5.9 Some trust deeds will state that a binding death benefits nomination must be in a set format, others will not state any particular format Some trust deeds may require the notice to comply with formal statutory signing requirements, including being witnessed by 2 people who are over 18 and it will lapse after 3 years This requirement follows the provisions of section 59(1A) and regulation 6.17A of SIS Those provisions can apply to non SMSF s and SMSF s but SMSF s do not have to comply with them to make a lapsing or non lapsing binding death benefits nomination (unless of course the SMSF trust deed requires that) However, if the trust deed stipulates that the provisions of section 59(1A) and regulation 6.17A of SIS are to apply, they must be complied with even if the fund is a SMSF when technically, SMSF s can make nominations that do not lapse after 3 years. Even if the trust deed does not specifically stipulate that requirement, the interpretation of the trust deed against the requirements of the law may mean that is what is required. So READ THE DEED. Sydney Estate Planning Lawyers Page 7

10 5.14 Subject to the terms and conditions of the trust deed: non SMSF s can only make a binding but revocable 3 year lapsing binding death benefits nomination; See section 59(1A) and regulation 6.17A of SIS for a 3 year lapsing binding death benefits nomination SMSF s can make a binding but revocable 3 year lapsing binding death benefits nomination; See section 59(1A) and regulation 6.17A of SIS for a 3 year lapsing binding death benefits nomination SMSF s can also make a binding but revocable non lapsing binding death benefits nominations. See section 59(1) of SIS and SMSFD 2008/3 for a revocable non lapsing binding death benefits nomination. Nothing in section 59(1) or 59(1A) means that a SMSF cannot make a non lapsing nomination (subject of course to the trust deed) Note Non lapsing binding death benefits nominations are permitted by the operation of section 59(1) of SIS. See SMSFD 2008/3 in which the ATO supports the view that a member of a SMSF can make a binding non lapsing but revocable death benefits nomination but only if the trust deed is appropriately drafted (although, this ATO view is not binding on a court) Note If the trust deed states that a nomination made in accordance with the superannuation law will be binding on the trustee, it is suggested that, after the case of Donovan v Donovan [2009] QSC 26, this form of nomination may only permit a 3 year lapsing form of binding nomination. It is best that the provision of the SMSF trust deed avoid references to being made in accordance with the law and focus only on a nomination once made being binding on the trustee and so, non lapsing 5.15 Normally, you can change or revoke a binding death benefits nomination unless of course you have made an irrevocable form of nomination, which is: not normally what is done; and should only be done in reliance on a specific provision in the trust deed that allows for that (and after getting advice) Revoking a prior nomination is normally done by: preparing a notice stating that the prior nomination is revoked; and if required by the trust deed, giving a copy of the revocation to the trustee and satisfying any other conditions set out in the trust deed Whatever you do, you must follow the terms and conditions of the trust deed in changing and/or revoking a nomination. So READ THE DEED. Sydney Estate Planning Lawyers Page 8

11 5.18 If the trust deed of a SMSF: permits a death benefits nomination to be binding; and does not provide that it lapses after 3 years (either specifically, which would not normally be the case or through the deeds adherance to the operation of regulation 6.17A), it will not lapse until: (d) it is revoked; or it ends in accordance with the terms and conditions: of the trust deed; or on which it was made The nomination can specify virtually anything you want to happen with your death benefits, including for example: (d) who should receive all or part(s) of your death benefits; the form in which they should be paid (pension or lump sum); what part (%) of your death benefits is to be paid; whether they should be paid to your nominated beneficiary: in cash; or via the transfer of specific assets. The only restriction is that it must only require the trustee to do things which are permitted by the law (for example, be payable to superannuation dependants or the legal personal representative of the member) If any part of the death benefits nomination is not valid, the notice is unlikely to be binding on the trustee For this reason, you should get appropriate advice before putting in place a binding death benefits nomination Good advice will also ensure that the binding death benefits nomination: is consistent with the superannuation fund member s estate planning objectives; and gives the most tax effective outcome. Sydney Estate Planning Lawyers Page 9

12 6. Does your superannuation form part of your estate when you die? 6.1 A most commonly misunderstood issue about death benefits is the interaction between the death benefits, the deceased superannuation fund member s will and their estate. 6.2 Death benefits are not personal assets of the superannuation fund member. So unlike an interest in a family home, death benefits do not automatically form part of a deceased member s estate. 6.3 Therefore, without something more than a provision under the deceased superannuation fund member s will saying I give my death benefits equally to X and Y, there is no certainty at all that X and Y will equally inherit the death benefits. 6.4 The question remains as to whether those benefits will actually form part of the estate of a deceased member. 6.5 As mentioned above, when a superannuation fund member dies, our superannuation laws require that their death benefits be paid to: either their superannuation dependants; or their legal personal representative (the executor of their estate), but without something more, not necessarily in accordance with the intentions of the deceased member. 6.6 If a superannuation fund member wants to control the outcome as to: who their death benefits are paid to; in what proportion they are paid; in what form they are paid, assuming that the trust deed permits it, they will need to complete: (d) (e) either a binding but 3 year lapsing death benefits nomination in accordance with the formal statutory signing requirements of section 59(1A) and regulation 6.17A of SIS; or a less formal but equally binding but non lapsing nomination to the trustee permitted by section 59(1) of SIS. If they don t do that, the trustee will normally be left with discretion to decide whether the death benefits are paid to superannuation dependants of a deceased fund member and/or their legal personal representative. 6.7 The ATO in SMSFD 2008/3 supports the view that a member of a SMSF can make a binding non lapsing but revocable death benefits nomination but only if the trust deed is appropriately drafted (although, this ATO view is not binding on a court). Sydney Estate Planning Lawyers Page 10

13 6.8 Sydney Estate Planning Lawyers preference is for a nomination permitted by a section 59(1) nomination, as: it does not need to comply with the statutory witnessing formality; and it does not need to be renewed every 3 years (ie it is non lapsing but revocable). 6.9 In each case: the trust deed must permit a binding death benefits nomination; and it can only be in favour of: a superannuation dependant; or the deceased superannuation fund member s legal personal representative If the death benefits are paid to the deceased member s estate, the will of the deceased member can then determine who receives their death benefits, including a non superannuation dependant If the death benefits are intended for a non superannuation dependant, they: first must be paid to the legal personal representative of the deceased member; and then the distribution of the death benefits to the non superannuation dependant can be controlled by a provision in the will. CAUTION Once paid to the legal personal representative, the death benefits form part of the estate of the deceased member and so are exposed to any challenge to the deceased member s will and their estate. If this may be a problem, further advice may be required about how to protect the death benefits If no consideration is given to this issue, it is quite possible that the trustee of the fund could pay the death benefits to: an unintended superannuation dependant of the deceased superannuation fund member (either in whole or in part) as in the case of Katz v Grossman [2005] NSWSC 934; or the legal personal representative of the superannuation fund member, where if no specific provision is made under the will for the payment of the death benefits, they will form part of the residue of the estate and be distributed accordingly. 7. What role does a member s will play in controlling who gets their superannuation? 7.1 If a section 59(1A) nomination is made, the superannuation fund member s will only plays a role if the nomination is made in favour of the member s legal personal representative when the provisions of the will then determine who gets the superannuation fund member s death benefits. Sydney Estate Planning Lawyers Page 11

14 7.2 If a nomination permitted by section 59(1) is permitted under the SMSF trust deed, the superannuation fund member s will could play 2 roles: the first is to make the nomination (but only if the trust deed specifically allows for that to happen including that it can be done via the member s will); and the second is to determine who gets those death benefits if they are paid to the legal personal representative of the deceased member. 7.3 If no nomination is made, a deceased member s will only plays a role if the trustee decides to pay the death benefits to the deceased member s legal personal representative. 7.4 Once paid to the legal personal representative: the benefits will be paid as specifically provided for under the will; or if no specific provision is made, they will form part of the residue and be distributed accordingly. 8. Must you have a binding death benefits nomination? 8.1 Just because you are a member of a superannuation fund does not mean that legally, you have to make a binding death benefits nomination. 8.2 However, at the very least, you should consider whether what you want to happen with your death benefits will happen without you having left a binding death benefits nomination. 8.3 The case of Katz v Grossman [2005] NSWSC 934 highlights the need for superannuation fund members of a SMSF to: either have left a binding nomination as to how they want their death benefits to be paid on their death; or to have considered it but have total trust that the surviving trustees of the superannuation fund will do the right thing. 8.4 In Katz v Grossman: (d) at the time of his death, Mr Katz and his daughter were the trustees of Mr Katz s SMSF; the trust and superannuation law permitted the surviving daughter to appoint her husband as her co-trustee of the fund; as trustee and as there was no binding nomination about the payment of Mr Katz s death benefits, the daughter and her husband then applied Mr Katz s death benefits for the daughter s benefit to the exclusion of her brother; the court held that this conduct was legal. Sydney Estate Planning Lawyers Page 12

15 8.5 Providing the trust deed permits for a binding nomination, one can be made: either under section 59(1A)/regulation 6.17A of SIS by way of a 3 year lapsing nomination; or in the case of a SMSF, as a revocable non lapsing nomination permitted by section 59(1) of SIS. 8.6 A section 59(1A)/regulation 6.17A nomination must comply with the statutory signing requirements including being witnessed by 2 adult witnesses and it only lasts for 3 years, when it must be renewed if it is to continue. 8.7 A nomination permitted by section 59(1) only needs to comply with the terms of the trust deed and can last indefinitely. The ATO in SMSFD 2008/3 supports the view that a member of an SMSF can make a revocable non lapsing binding death benefits nomination but only if the trust deed specifically allows it (although, this ATO view is not binding on a court). 8.8 Sydney Estate Planning Lawyers view is that a nomination permitted by section 59(1) is preferable for a SMSF, as: it requires less formality; and because it does not have a 3 year limited life. 8.9 However, the trust deed must specifically permit for it to happen If it does, the trust deed will spell out that a member of the fund can make a written nomination (and any form in which it can or must be made, but specifying the form is not an essential element for a trust deed to allow for a binding death benefits nomination) If the trust deed specifically permits, the section 59(1) nomination can be made under the member s will Even though, in that case, a nomination can be made by a will, technically, death benefits do not form part of the personal assets of a deceased superannuation fund member, like say an interest in a family home would If the SMSF trust deed permits, in the case of a nomination permitted by section 59(1), the will just happens to be a means of: both making a nomination; and ensuring who gets the death benefits after the death benefits have been paid as provided by the nomination Non SMSF s are different as they have independent trustees to administer them. Sydney Estate Planning Lawyers Page 13

16 8.15 If there is no nomination that is binding on the trustee, the superannuation law permits a trustee of a SMSF to pay death benefits to: a superannuation dependant; or the legal personal representatives of the deceased superannuation fund member. So being the trustee of the fund can be a very important role particularly in a SMSF where the trustees are not normally independent. In a SMSF, if you don t 100% trust your co-trustees / your co-directors, you may need to give some serious thought to this If a fund trustee pays death benefits to the legal personal representative of a deceased superannuation fund member under the superannuation laws, those benefits will typically form part of the residue of the estate and be distributed accordingly, unless of course specific provision has been made for them under the will once they have been paid to the estate However, without a binding nomination in favour of the legal personal representative, they cannot be specifically gifted under the will unless the trustee in exercising the trustee s discretion happens to cause them to be paid to the deceased member s estate Remember, even if you do have a binding death benefits nomination in place, contracts were made to be broken. Sometimes, there can be no guarantee that what you want to happen when you die will happen. So, if you are making a binding death benefits nomination because you don t think that what you want to happen will happen without it and you cannot 100% trust those who will be in control of the payment of the death benefits after you die, you should reconsider your plans and get expert advice. 9. Should you leave a binding death benefits nomination? 9.1 Sydney Estate Planning Lawyers view is that members of a SMSF only need a binding death benefits nomination if they cannot otherwise be certain that their death benefits will pass in the way that they intend if they don t have a nomination. 9.2 Just as a binding nomination is desirable in getting certainty in the passing of death benefits, in a husband and wife fund for example, where: there are children and some are under 18 or otherwise dependant on the superannuation fund member (including financially) and some are not; the family relationships are harmonious; and all members of the family can be trusted to work together in reaching the desired outcome (with parity in an after tax sense), not having a nomination is probably not going to be fatal. Sydney Estate Planning Lawyers Page 14

17 9.3 In an appropriately structured will and given a harmonious family unit, the absence of a nomination can actually leave the family with greater flexibility in managing the tax effective passing of wealth on death. 9.4 It must be kept in mind that once made and unless revoked, a nomination may not take into account the changing circumstances of the superannuation fund member. 9.5 Therefore, not only should they never be made in isolation from the estate plan and only then with care, they should be constantly reviewed. 10. When might a binding death benefits nomination be appropriate? 10.1 A non exhaustive list of situations in which a binding death benefits nomination might be appropriate is: (d) at any time if the superannuation fund member can t be assured of a fair outcome without it; if the fund consists of more than a husband and wife, a nomination ensures that the death benefits end up where the deceased wants them to go without the need to get trustee consensus; in a husband and wife fund where there is a lack of trust between them (or in any SMSF where there is a lack of trust between the members); where provision is to be made for children when one or both spouses die, particularly: in a blended family; or where not all children are trustees and relationships between children are not harmonious, a nomination can be used to ensure that the death benefits pass in the way the parents want. (e) if there are tax dependant and non tax dependant children, the nomination can also be used to ensure that the benefits pass not only fairly but tax effectively. Note If equality is to be reached, a clause that leaves a legacy to non tax dependant children can cope with the different tax treatment of the payment of death benefits to tax dependants and non tax dependants. This mechanism not only ensures equality but can avoid stamp duty problems in otherwise trying to get equality outside the terms of the will. There must be enough personal assets for this mechanism to work properly. (f) where: unequal provision is to be made from a member s wealth to their intended beneficiaries; and Sydney Estate Planning Lawyers Page 15

18 death benefits are to be used to do it (particularly where not all of the recipients are trustees of the fund). (g) where someone other than a superannuation dependant is to get the death benefits: the death benefits will first need to be paid to the legal personal representative of the deceased superannuation fund member; and the will must then make the gift of those benefits to the non superannuation dependant Of course the fund's trust deed could leave the trustee enough discretion as to how the death benefits can be paid and assuming the surviving trustee does what the deceased would want and does it tax effectively, the same result can be achieved without a binding nomination. This may still require a mechanism under the will to ensure that equality can be reached using other personal assets of the member to even things up. 11. Things to check before using a binding death benefits nomination? 11.1 Before putting a binding death benefits nomination in place: you should first get legal, accounting and taxation advice from: professionals who know what they are doing; and are experienced in superannuation, taxation and estate planning law; (d) (e) satisfy yourself that the trustee will do the right thing and follow the nomination when you die. If you cannot trust the trustee to follow the nomination when you die, you need to reconsider what you are doing; if there is a reversionary pension nomination in place for an existing pension, ensure that the death benefits nomination about to be made does not override the reversionary pension nomination; satisfy yourself that a nomination is necessary to ensure that what you want to happen when you die will happen; identify any existing nominations and specifically revoke them if they are inconsistent with what you now want to do under the binding death benefits nomination; This should be done for any existing non binding and/or binding nominations simply so that there is no later confusion about what the deceased member intended. Make sure that: the revocation is clearly dated and properly signed; there is compliance with the trust deed s requirements for an effective revocation of the existing nomination; and Sydney Estate Planning Lawyers Page 16

19 (iii) (iv) there is evidence of that compliance; and those that need to know, do know about what you have done. You should consider advising your executor, family and intended beneficiary of the revoked and new death benefits nomination about: (v) (vi) what you have done; and why you have done it. Note Managing expectation can be a very important thing in the harmonious passing of wealth on death. (f) it is only after taking advice that you should complete and sign any pro forma nomination document that has been given to you: as part of the trust deed set up documentation; or by a well meaning adviser who has suggested to you that because you have superannuation you must have a nomination, and only then after the lawyer giving you the advice: (iii) (iv) has completed it and tells you that the pro forma is sufficient for what you want to do including that all prior deeds of amendment to the SMSF trust deed and changes of trustee have been effectively completed so that the current nominations are in turn effective; or tells you that: (A) (B) (C) it should not be used; and changes should first be made to the trust deed, if required; and once they are made, only then can a form of nomination be signed that they prepare for you; Annexure 1 sets out a pro forma death benefits nomination template. It should never be used without taking advice and it should never be used without making sure that it complies with the terms and conditions of the applicable trust deed. (g) make sure the death benefits nomination you want to make: aligns with what you want to achieve in passing your wealth on your death, including under your will and broader estate plan; gives a tax effective outcome; (h) check that all prior deeds of amendment to the SMSF trust deed have been effectively completed so that the current nominations are in turn effective; Sydney Estate Planning Lawyers Page 17

20 (j) check that all prior changes of trustee have been effectively completed so that the current nominations are in turn effective; ensure that the nomination is only in favour of: one or more of your superannuation dependants; and/or your legal personal representative (and in which case, no other words should be used); (k) (l) if you want to nominate a superannuation dependant to receive the death benefits, instead of paying it to the superannuation dependant directly, consider first having the death benefits paid to your estate where it can be gifted to the superannuation dependant under your will through the use of tax effective testamentary trusts; if the parties wanting to make the nomination are a husband and wife and they are the only members and trustees / directors of a corporate trustee of a SMSF, on the earlier death of 1 of them, do they need a nomination at all, as not making 1 can give the surviving spouse greater flexibility about the use of the death benefits on the earlier death of 1 of them; It is only on the later death of both of them that a nomination to the legal personal representative may be necessary to ensure that some family members who would normally control the estate (and therefore the SMSF trustee) as executors do not do the wrong thing by the other family members by paying the death benefits to themselves; (m) (n) if the superannuation fund is not a SMSF and an independent trustee will be making the decision about the payment of death benefits after the death of a husband and/or wife, if they have children, if there is no nomination, often the independent trustee will exercise their discretion to pay the death benefits in favour of the surviving spouse and children, which is not necessarily what the husband and wife may want, so care needs to be taken when making this decision for a non SMSF situation; READ THE DEED - look at the SMSF trust deed to see what provision it makes for: a section 59(1A), regulation 6.17A nomination (a binding 3 year lapsing nomination); or a nomination permitted by a section 59(1) (a binding non lapsing nomination); (o) (p) be careful of expressions in the trust deed that require the nomination to comply with the superannuation law, Statutory Requirements or Relevant Requirements as those things do not necessarily mean that the nomination must comply with the requirements of section 59(1A) and regulation 6.17A (and be a binding 3 year lapsing nomination); if no provision is made in the deed for a binding nomination or the provision is not clear, depending on the desired outcome, the SMSF trust deed may need to be updated; Sydney Estate Planning Lawyers Page 18

21 A provision as simple as the following would be effective to make a nomination binding on the trustee as a non lapsing revocable death benefits nomination that does not have to comply with the requirements of section 59(1A) and regulation 6.17A: A member may in writing nominate the member s legal personal representative or their superannuation dependants to whom the trustee must pay their death benefits. Of course, it would have to be read in the context of all of the terms and conditions of the trust deed. So READ THE DEED. (q) (r) if the nomination is to be non revocable, provision to make a non revocable nomination should be added to the trust deed (including, possibly, to also allow the beneficiary of that nomination to vary it with the consent of the trustee, which allows greater flexibility in the administration of the benefits). So READ THE DEED if the benefits are to pass to a non superannuation dependant and the SMSF trust deed permits for: either a section 59(1A) nomination; or a nomination permitted by section 59(1) or both, a nomination will first need to be made that the death benefits be paid to the legal personal representative of the deceased superannuation fund member where the will can provide what happens next; So READ THE DEED (s) if the benefits are to pass to a superannuation dependant and the SMSF deed: (iii) either permits for a section 59(1A) nomination; or a nomination permitted by section 59(1); or both, a nomination can be completed directly in favour of the superannuation dependant and the benefits do not need to form part of the estate at all but there can be important estate planning and taxation benefits by having them: (iv) (v) first pass to the deceased superannuation fund member s legal personal representative; and then, as part of the estate, the will gifting them to the intended beneficiary including through a tax effective testamentary trust; (t) in making the nomination: avoid uncertain expressions, such as wish; if the death benefits are to be paid to the member s estate, only ever nominate the legal personal representative to be paid the benefit; Sydney Estate Planning Lawyers Page 19

22 For example, do not say: (A) (B) (C) (D) my estate, to my legal personal representative ; to my executors ; to my estate ; to the trustees of my deceased estate. (iii) if it is to be paid to a superannuation dependant, never state that the superannuation dependant is only to receive the benefit if they survive you for 30 days, which is what typically happens to a gift under a will, as that will require the superannuation dependant to survive for that period before being able to get the benefit out the fund tax free (where for example, it is to be paid to a spouse of the member) and the opportunity may be lost forever if the surviving spouse also dies within that 30 day period; Note Ensure that husband and wife members have powers of attorney in favour of 1 another and they also have substitute powers of attorney. In this case, if say a husband member dies in a car accident and the wife member is left incapacitated, the attorneys can act under their appointments to get the benefits out of the fund tax free while the surviving wife member is still alive. (u) check what the conditions / requirements are for the making and completion of the binding death benefits nomination, for example, witnessing and dating or service of a copy on the trustee of the fund and make sure that: those conditions / requirements are satisfied; and there is a record of their satisfaction; So READ THE DEED (v) consider advising your executor, family and intended beneficiary of the death benefits about: (iii) what you have done; why you have done it; where they can locate a copy of the nomination; Note Managing expectation can be a very important thing in the harmonious passing of wealth on death. (w) (x) consider using a provision in the will that ensures after tax equality between those who do and don t receive death benefits (including for tax reasons); that the deed allows for a nomination to be partially effective; Sydney Estate Planning Lawyers Page 20

23 (y) you constantly review the death benefits nomination: for its currency; and if the nomination is only a 3 year lapsing nomination, that it is revoked and renewed before it lapses Contact us for a copy of our comprehensive death benefits nomination checklist. 12. What is a reversionary pension? 12.1 If you convert your superannuation to a pension (a superannuation income stream), you can nominate a reversionary beneficiary for that pension. This is different to making a death benefits nomination A reversionary beneficiary is someone to whom the pension automatically reverts (continues) to on your death. So a reversionary pension is a superannuation income stream that does not stop on the death of the member drawing the reversionary pension A reversionary pension has the same effect as a death benefits nomination in ensuring that another person benefits from a deceased member s superannuation, but it is not a death benefits nomination The superannuation income stream will not be reversionary if the trustee has the power to decide: who the death benefit will be paid to; the form in which the death benefit will be paid; the amount of the death benefit that will be paid. See Law Companion Guide 2017/3 paragraphs 10 to The reversionary beneficiary of the pension must be a superannuation dependant As long as the trust deed: specifically allows the trustee to agree to the making of a reversionary pension (which if not part of the trust deed, would mean that in following the reversionary pension benefit nomination, the trustee would be breaching what is called the rule against fettering the discretion of the trustee ); specifically allows the trustee and the member for whom a pension is set up to bilaterally agree to the terms and conditions that will apply to the pension (including the reversionary pension nomination), although, in this case, when setting up the pension, it is best that all members of the SMSF sign off on the terms and conditions of the pension to ensure that there is no later dispute about the SMSF trustee complying with the reversionary pension nomination; Sydney Estate Planning Lawyers Page 21

24 does not specifically: stop you having a reversionary pension benefit nomination of your pension; or state that a binding death benefits nomination will override a reversionary pension benefit nomination; (d) does not require certain steps to be followed in setting up a reversionary beneficiary of your pension (which does not stop a reversionary beneficiary nomination being set up, it just means that those steps must first be followed); you can readily nominate a reversionary beneficiary of your pension when setting up the pension by making the nomination of the reversionary beneficiary a condition of setting up the pension The reversionary beneficiary must be nominated at the time of setting up the pension If there is a need to change it in any way after setting up the pension, it is best that the pension is stopped and start the process again, rather than seeking to vary the terms and conditions of it mid stream. However, if the trust deed specifically allows it to be varied mid stream, that would be in order If the trust deed requires certain steps to be followed in setting up a reversionary beneficiary of your pension, make sure that they are followed As long as the ingredients of paragraphs 12.6 and 12.6 are present, the trustee has an obligation to follow your instructions when you nominate a reversionary beneficiary for your pension(s) because, under the SMSF trust deed, you and the trustee have put in place a contract about what happens to your pension benefit when you die The trustee would have to break that agreement (without your consent) in order to pay the benefit in some other way Note that this approach of setting up a reversionary pension is only possible if you convert your superannuation to one or more pensions before you die If your balance is still accumulating when you die, it is not possible to nominate a reversionary beneficiary as there is nothing to revert Similarly, if only part of your balance has been converted to a pension, your reversionary pension beneficiary will only have an automatic entitlement to the pension balance of your death benefits for which a reversionary pension benefit nomination has been made, not your entire death benefits Once you die, it will be the reversionary beneficiary who controls your death benefits when they die. So if you want the death benefits to pass in a certain way after the reversionary beneficiary dies, you will need to consider that at the time of putting in place the reversionary pension benefit to make sure that your intentions are seen to. See the next paragraph 13 about how to do this. Sydney Estate Planning Lawyers Page 22

25 13. Why have a reversionary pension? 13.1 It used to be that a reversionary pension ensured that for taxation purposes, the income stream continued after the death of the member This meant that the taxation of the income stream did not change because the member died With a non reversionary pension, when the member receiving the pension died, the fund would go from pension phase to accumulation phase for income tax purposes This brought with it the obvious problems that income paid from the fund would not be taxed as a pension would and that income within the fund, including on any capital gains arising from the sale of fund assets after the member s death, would also be taxable The ATO in TR 2013/5 has now confirmed that the income stream from the payment of a non reversionary pension does not cease automatically on the death of a member and so a taxation driver to have automatically reverting pensions has now fallen away So why else would a reversionary pension be desirable? 13.7 A reversionary pension is desirable: or in this case, was desirable before 1 January 2015, as it allowed the beneficiary of a reversionary pension created before that date to continue to access certain seniors card social security benefits (so be careful of changing any existing reversionary pension documentation set up before this date without considering this); because with the introduction of the $1.6m transfer balance cap rules from 1 July 2017: the reversionary beneficiary has 12 months from the death of the original pensioner to make a decision about what to do with the benefit; and movements in the value of the pension over that time are not taken into account in managing compliance by the reversionary pensioner with the their transfer balance cap obligations (so investment returns and insurance proceeds will not count in the reversionary pensioners cap); if there is an age differential between the husband (eg age 67) and wife (eg age 50) members of the SMSF, where on the death of the husband, the wife will receive the pension benefits tax free, even though the wife is under the age of 60 (where if a pension was only started on the husband s death, the pension stream would not become tax free until the wife also reached the age of 60); (d) because on death of the member being paid the reversionary pension, there is no need for any of the paper work required to either start a pension or pay a lump sum; Sydney Estate Planning Lawyers Page 23