In this week’s edition of ‘It depends’, partner Hayley Mitchell talks about whether you need a binding death benefit nomination for your superannuation.
Hi and welcome to another edition of it depends. Today, I am going to be talking about whether or not you need a binding death benefit nomination for your superannuation benefit.
Do I need a binding death benefit nomination for my superannuation benefit?
So, the straight up answer to this is it really does depend and it depends on a multitude of factors that I’m going to go through today.
What is a binding death benefit nomination?
First, I’ll take a step back and explain what a binding death benefit nomination is. You might hear them referred to as a non-lapsing binding nomination, a binding nomination or a BDBN which is the acronym for binding death benefit nomination. When a person dies the starting point is that the trustee of the superannuation fund actually has a choice or the discretion as to who they pay the balance of your superannuation to. Now they’re limited to a certain class of beneficiaries, but they can choose between those people who they will pay. So, the point of a binding death benefit nomination is, you as the member of the superannuation fund, are actually nominating who you want to receive the balance. And once you’ve made that binding nomination, it’s binding, as the name suggests on the trustee. The trustee then has to pay your balance in accordance with the nomination. It takes the choice away from the trustee altogether. For some further details about what happens to your superannuation when you die, take a look at our It Depends session with Steven Jell, who covers this topic.
How do I decide whether or not I need a binding death benefit nomination?
This is where it really does depend. There might be good reasons why you don’t want a binding nomination at all and you’re leaving the decision up to the trustee to make after your death. So, there’s a bit of a process to go through to determine whether or not you need a binding nomination, and if you do, who you nominate in that nomination. One of the first factors to consider is whether you’re with a retail or industry fund, or whether you have your own self-managed super fund. With the retail and industry fund, the trustee is going to be a board of directors in Sydney somewhere, people that you don’t have a personal connection with typically. Whereas, with your self-managed super fund, the trustee is usually going to be a family member or friend. You will know who the trustee is and who will be making the decision after your death.
The second factor is looking at how much you have in superannuation and whether there are going to be any considerations for the transfer balance cap rules. So in 2017, the government introduced new rules and capped the amount that can be held in pension phase, and in relation to your binding nomination, this really introduced a need for some financial and tax planning around who you nominate in your binding nomination. This is an example of when having flexibility, so, not having a binding nomination in place, may be the better option. This will allow the trustee to pay the balance of your super to the beneficiaries or the structures that will enable the best financial and tax outcome.
One of the other important things to consider is whether or not any conflict of interest is going to arise. So, a conflict might arise where your intended beneficiary is also acting as the executor of your estate. Or they might be the person that’s left as the trustee of your self-managed super fund. If they’re wearing multiple hats as a beneficiary and one of those executor or trustee positions, they might have a conflict between making a choice if they want to pay themselves the death benefit. This is a scenario where having that binding nomination in place will take that conflict of interest out of the equation.
So, the other piece of advice that we give our clients is it is important to diarise or undertake a periodic review of your binding nomination. Some binding nominations will lapse after a period of time, typically three years. So, if the nomination lapses, it’s no longer valid and binding. You need to update it and renew it for it to become binding again. The other point is a binding nomination and the decision whether or not you make one, is not a set and forget decision. So, it’s important to review this periodically together with the terms of your will. So, as you can see, the answer to the question is really it does depend and it depends on your individual circumstances.
If you would like further advice on your binding nomination or whether or not you need to make one, contact a member of our private clients team.