Superannuation and succession planning: the importance of getting your house in order

All employed Australians working and residing in Australia are required to have superannuation and it is a predominant source of income upon retirement. Despite how central it is to an individual’s lifestyle in their post-work years, it is not commonly understood what happens to your superannuation when you die and how it should be factored into succession planning.

While a person’s assets are generally dealt with under an executed will, superannuation is treated separately as it is not considered part of an estate. The manner to deal with superannuation depends on how it is treated (be it through an industry or retail super fund or self-managed super fund (SMSF)).

This article provides a high-level overview of SMSFs, the documents necessary for effective succession planning, what generally happens to your superannuation when you die and the common mistakes to avoid with respect to your SMSF as part of succession planning.

How SMSFs work

SMSFs, like retail or industry super funds, are managed by the trustee of the fund. Trustees can be:

• individual trustees, where each member of the fund is a trustee, and vice versa; or
• a corporate trustee, where each member of the fund is a director of the corporate trustee, and vice versa.

Like other super funds, SMSFs have trust deeds that set out the rules of the fund. Trustees are responsible for investment decisions, compliance with the regulatory framework, and even the payment of death benefits.

What are the key documents for superannuation succession planning?

Superannuation benefits generally do not form part of a member’s estate upon death, and as such are not governed by a will.

 Instead, the distribution of death benefits will be governed by the SMSF trust documents, such as:

• the SMSF Trust Deed (Deed);
• Death Benefit Agreement (DBA);
• Binding Death Benefit Nomination (BDBN) or Non-Binding Death Benefit Nomination (NBDBN);
• Pension Payment Agreement (PPA);
• pension letters between the members and trustee; and
• minutes of trustee meetings relating to pensions.

If there is no binding nomination, the trustee will ultimately have a discretion as to how death benefits are paid, which may be:

• as a lump sum or income stream, to a dependant of the member; or
• as a lump sum, to any other person.

In order to ensure that superannuation death benefits are paid to the intended person, members should execute a DBA, BDBN or NBDBN (as appropriate and in accordance with in the Deed).

BDBNs will (and DBAs can) bind a trustee to distribute superannuation death benefits in a particular way. The nominated person may be the ‘legal personal representative’, being the executor or administrator of the member’s estate, so that the benefits can in effect be distributed as part of the estate. Binding nominations or DBAs can remove potential for conflict and complexity for the trustee, who would otherwise be obliged to consider all eligible beneficiaries in good faith before paying out death benefits.

Common issues

SMSF members should be aware of the following common issues regarding the distribution of death benefits:

• Lapsing nominations: The High Court has now confirmed that regulation 6.17A of the Superannuation Industry (Supervision) Regulations1994 do not apply to BDBNs in SMSFs, meaning that nominations will not lapse after three years (unlike in other funds). Nevertheless, members should ensure that any nominations have not lapsed under terms imposed by the Deed or the BDBN itself.
• Non-binding nomination: Please consider whether the nomination you are making is intended to be binding in all circumstances, and if so, ensure that you have executed the appropriate documentation correctly.
• Incorrect execution: BDBNs form part of the Deed and as such are subject to the signing requirements of a Deed. Incorrect execution may render nominations ineffective.
• Individual trustees: Where there are two individual trustees, and one dies, another individual trustee will need to be appointed before any benefits can be distributed. For this and other reasons, it is generally advisable to appoint a corporate trustee for your SMSF.
• Exercise of trustee’s duties: If there is no binding nomination or agreement, the trustee will be required to consider all eligible beneficiaries in good faith before distributing the benefits. They may be removed as trustees if they fail to understand and exercise their duties under the trust deed.
• Lack of presumption: Where no binding nomination, there will not necessarily be a preference to the interests of dependants of the deceased over other beneficiaries of the estate.[1]

For these reasons, it is helpful to ensure that there is a permanent and binding death benefit arrangement when setting up a SMSF. There is no charge for a BDBN or DBA if ordered on SMSF set up with Cleardocs.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask to speak to a member of the Tax & Structure team.

You may also find the following related articles by Maddocks of assistance in relation to your SMSF:

• NALI Updates Now In Force: What The Changes To NALI Mean For Your SMSF
• Reminder For SMSF Trustees: Be Aware Of Legal Requirements For Accessing Superannuation Early
• SMSF Trustees: Why Should I Use A Corporate Trustee?
• Incapacity Of SMSF Members - The Benefits Of An Enduring Power Of Attorney
• Is Now The Time To Update Your SMSF Deed?
• Death & Super: No, Your Estate Documents Do Not Determine What Happens

Order related document packages

• Superannuation (SMSF) Documents
• Estate Planning Documents
• Trusts Documents

[1]Wan v BT Funds Management Ltd [2022] FCA 302 at [110]-[111].