SMSFs: To bind or not to bind? Binding and non binding death benefit nominations

Insights21 Nov 2019

In the fifth video of our series examining the five key self managed super fund (SMSF) estate matters you must talk to your client about, Lawyer Juliet O’Brien highlights issues to consider when deciding if your client’s superannuation death benefit nomination is to be binding or non-binding.

Often your client’s personal circumstances will mean that they are comfortable to permit the trustee of their fund, which often is their surviving spouse, to make the decision regarding where to pay their super. If this is the case, a non binding nomination is often the best option.

But when might a binding nomination be more appropriate?

Does your client have children from an earlier or later relationship who they want to give their superannuation?

A binding nomination will ensure superannuation passes directly to the nominated beneficiaries and will remove possible uncertainty created by a non binding nomination.

Does your client want to give their superannuation to a surviving partner or child, that might become problematic if the gift is made through their Will?

If superannuation passes to the estate and a claim is made against the estate for further provision, any superannuation passing to the estate will be caught up in the claim. This will delay the distribution of the superannuation and may result in the intended beneficiary not receiving the superannuation or receiving a reduced amount. If a client wishes to avoid superannuation being impacted on by a claim being made against their estate, a binding nomination directly to an individual will be the better option.

Is the estate likely to be subject to a claim or litigation after death?

If a client suspects that their estate may be the subject of a claim after their death, a binding nomination directly to an individual will be the better option. This will remove the client’s superannuation from their estate. The superannuation will then not be subject to the claim and can also be paid out to the beneficiary quicker.

Is there any chance that a trustee of the fund might not abide by their wishes?

If there is any possibility that the trustee of the superannuation fund will not abide by a client’s wishes, and will pay superannuation to a beneficiary that your client did not intend to benefit, a binding nomination is a better option. This nomination will bind the trustee to pay the superannuation to a designated beneficiary, being a superannuation dependant or to the legal personal representative, being the executor of the estate.

The above are general points to consider, and legal advice on specific circumstances should always be taken. It is also important to remember that the terms of the trust deed must be complied with if the nomination is to be legally effective and valid.

Whatever your client’s wishes might be, a death benefit nomination should not be looked at in isolation, and should be considered and drafted in conjunction with their Will and other succession planning documents, to make sure there is no inconsistency.