How to enter the great unknown... with certainty

Why introduce binding death nominations? The answer lies in the fact that for many superannuation fund members, there has not been certainty as to whom their benefit will be paid in the event of their death. The introduction of binding death nominations reduces this uncertainty for fund members and operates as a form of direction to a trustee.

Another driving factor is that family structures are becoming more and more complicated. The typical family consisting of two parents and two children is slowly diminishing. Binding nominations may be appropriate for people who have remarried and want to ensure their death benefits are paid to specific dependants, such as their new spouse only.

Furthermore, where there are children from previous marriages, members can direct that their death benefit be paid to their own children, not their spouse’s children. In this case, binding death nominations will enable the parties to address the issue of additional potential beneficiaries and direct which ones receive any death benefits (and also in which proportions).

If the trustee is not subject to a binding death nomination, it retains a discretion to determine who can receive a death benefit and in which proportions. This also involves a ‘claimstaking’ process that can be lengthy, and subject to challenge.

The legislation governing binding death nominations allows a superannuation fund member to specify to whom and exactly what proportion of their death benefit will be paid to their dependants and/or legal personal representative.

A valid nomination is legally enforceable and binding on the trustee of a superannuation fund. Any death benefit must be paid in accordance with a valid binding nomination, thus providing an effective estate planning tool for superannuation fund members.

Where a binding death nomination is not present, or the nomination lapses or is deemed invalid, the payment of the death benefit proceeds will revert to trustee discretion. Trustee discretion is rarely challenged when the deceased member’s family circumstances are simple and their wishes are clear. With complicated family structures, the trustee decision can be difficult and subject to challenge by other family members.

A binding death nomination also reduces the ability of the Superannuation Complaints Tribunal to overturn a death benefit payment, which is later challenged by the dependents of the deceased member.

However, simply because trustee discretion is removed by the implementation of binding death nominations, absolute certainty over the benefit is not assured.

It is arguable that in some states a binding death nomination could be challenged under the relevant Family Provisions legislation and any benefit dealt with under a binding death nomination could form part of a ‘notional estate’. Such an argument is, as yet, untested at law, but must be borne in mind when considering a client’s estate planning requirements. In any event, trustee involvement will be minimised in such cases, as the nomination is legally binding on the trustee.

An important facet of the legislation is that in order for a nomination to be ‘valid’, any nominated beneficiary must be a legal dependant of the member, or the legal personal representative of the member. The definition of legal dependant includes the spouse (or defacto spouse) or any children of the member, as well as any other person who is financially dependant on the member. Therefore, same-sex partners and parents of the member will not automatically qualify as dependants under the legislation.

The introduction of binding death nominations, at first glance, appears theoretically simple. However, offering binding death nominations can be quite an onerous process for a superannuation fund trustee. The process may also be complicated for financial planners looking to establish a binding death nomination for a client. The trust deed of the superannuation fund needs to be altered so that the trustee can accept binding death nominations.

Administration procedures and systems must be altered so that adequate processes and data recording can be maintained by the fund, which may prove to be costly to fund members and burdensome for trustees. The nomination must be signed before two adult witnesses, who are not mentioned in the nomination.

In addition, details of nominations must be reported to members on an annual basis, thus increasing the annual reporting requirements for trustees. The trustee must also ensure that members are provided ample opportunity to amend, confirm or revoke their binding death nomination at any time.

The trustee must ensure that members are aware that their binding death nomination will expire three years from the date it is signed by the member and therefore it must be reviewed or confirmed at least once every three years. For example, if a member with a binding death nomination divorces, re-marries and has a child within the three year period and does not update their nomination for the changed circumstances, then the existing nomination will exclude the new spouse and child. If the member dies without updating the binding death nomination, then the current spouse and child may be left with no death benefit entitlements.

Although not as simple as most of us would wish, binding death nominations are an effective estate planning tool, providing comfort and certainty for superannuation fund members in the event of their death.

Kathryn Person is technical manager of superannuation and retirement planning at INGAustralia.