What approach should advisors take to the form of binding death benefit nominations?
In an earlier article, ClearLaw raised some concerns about the view that some lawyers and other advisors are taking as to the requirements for making binding death benefit nominations. In particular, the ClearLaw article:
- queried the validity of the legal arguments being used to suggest that the requirement for a binding death benefit nomination to lapse after 3 years does not apply to SMSFs. In fact, the law in this area is far from clear. So the most sensible thing to do is to proceed on the basis that the 3 year limit does apply (along with all the other rules about how to make a binding nomination); and
- queried the usefulness of the ATO's non-binding guidance on the topic.
You can read that earlier article on the 3 year lapsing issue here.
Also, here you can read the ClearLaw article about the more flexible solution available through Death Benefit Agreements — which are binding and do not lapse.
The recent case of Donovan v Donovan, while not specifically addressing the lapsing/non-lapsing issue, is consistent with the sensible approach Cleardocs has taken to the issue on advice from Maddocks.
Tips from Donovan v Donovan for SMSF trustees and members
The key tips from the case are:
- The legislation regarding SMSFs is 'notoriously convoluted'. Therefore, SMSF deeds may require binding death benefit nominations to follow the regulations regarding such nominations generally, as the judge put it, 'out of an abundance of caution'2.
- SMSF trustee(s) and members need to be aware of the governing rules of their SMSF (that is, their SMSF deed). In particular, members must strictly follow the provisions contained in the deed about binding death benefit nominations. Otherwise the remaining trustee(s) (or director(s) of the trustee), will have the final say in deciding who receives the death benefit of the deceased member.
The Cleardocs Deed
Reflecting a cautious approach to binding death benefit nominations, the current version of the Cleardocs deed provides that for a death benefit nomination to bind the SMSF trustee(s), the nomination must follow the requirements relevant to death benefit nominations generally — including, for example, the 3 year time limit. The soundness of this approach is confirmed by Donovan v Donovan.
Flexibility and certainty available through Death Benefit Agreements
To provide customers with sufficient flexibility and certainty, Cleardocs has created the Death Benefit Agreement as a third option to a binding or non-binding death benefit nomination. The Death Benefit Agreement:
- is not required to take the form prescribed for binding death benefit nominations generally; and
- does not expire after 3 years (one of the restrictions under the Regulations).
For more information regarding the Cleardocs Death Benefit Agreement please click here
Donovan v Donovan — a summary
Although, Donovan v Donovan touches on some interesting issues, the case does not answer the key question concerning Binding Death Benefit Nominations and SMSFs — that is:
"Does a binding death benefit nomination expire after 3 years?"
The answer to that question depends on the answer to a broader legal question which is:
"Are SMSFs bound by the regulations about binding death benefit nominations that apply generally to superannuation funds?"
Here is a summary of the case.
The Facts in Donovan v Donovan
Two years before the trustee and member of an SMSF died, he wrote a letter to the SMSF trustees expressing his wish that the residuary of his account be left to his legal personal representative in accordance with his will.
The parties' arguments about the letter
The validity of the deceased's letter was challenged in court:
- The deceased's widow argued that:
- The letter did not constitute a binding death benefit nomination because it did not show an intention that it was to bind the trustee.
- Therefore, the letter was ineffective and she (as the remaining SMSF trustee) was able to decide to whom the deceased's benefits were to be paid — including, presumably, to herself.
- The deceased's daughter argued that:
- The SMSF's deed did not require the nomination to take a particular form and that the letter constituted a binding death benefit nomination.
- Therefore, the deceased's death benefit would form part of his estate and she would then (presumably) benefit as beneficiary of her father's estate.
The Court had to decide whether the letter constituted a binding or non-binding death benefit nomination.
What the SMSF's deed said
The relevant provisions of the SMSF deed are:
- in clause 11.4 which provides:
(a) a Member may designate a Dependant or legal person representative of the Member as the person entitled to payment of the Death Benefit in writing to the Trustee in such form as the Trustee may from time to time approve;
(b) a Member may make a binding death benefit nomination in the form required to satisfy the Statutory Requirements;
clauses 11.5 and 11.6 which provide:
11.5 Where a Member has made a valid binding death benefit nomination in accordance with Rule 11.4 the Trustee must pay the Death Benefit to the nominated legal personal representative or Dependant of the Member.
11.6 Where a Member does not have a binding death benefit nomination in force, any Death Benefit shall be paid as the Trustee in its absolute discretion decides to such one or more of the nominated beneficiaries (if any) or other Dependants or legal personal representatives of the Member.
The Court's Decision
The Court held that:
- The letter did not show an intention that it was to be a binding death benefit nomination.
- Although the SMSF deed contemplated that both binding and non-binding nominations could be made, the letter failed to specify which type of nomination it was.
- Even if the nomination were not required to take a particular form in order to be binding (that is, the form specified for death benefit nominations generally), 'it could hardly be expected that [the deceased] would have known that'3.
Unfortunately, the Court did not provide any guidance as to what would have established the necessary intention to make the nomination binding on the remaining trustee.
Other useful comments
Although not essential to the decision above, the Court made some helpful comments concerning the form of any binding death benefit nomination required under the Deed.
The Court found that the regulations regarding binding death benefit nominations generally had been incorporated by reference into the governing rules of the SMSF. The Court held that the reference to 'statutory requirements' made it clear that the Deed intended that for a death benefit nomination to be binding, it must follow the regulations applying to death benefit nominations generally. The reasons the Court gave for this reasoning were:
- that the clause concerning binding death benefit nominations in the SMSF deed would otherwise be useless; and
- that the SMSF deed had specified that the 'statutory requirements' regarding binding death benefit nominations must be followed 'out of an abundance of caution'4.
The major issue: Does 6.17(4A) of the SIS Regulations apply to SMSFs?
As the court found that the nomination in question was not binding because of a failure of intention, the Court stated that it was unnecessary to decide the major question about which there is so much uncertainty. This major question is whether the regulations concerning binding death benefit nominations generally apply to SMSFs — that is: if the regulations have not already been incorporated by reference into the SMSF deed, as was so in the Donovan case.
The ATO has previously stated that, in its opinion, the regulations regarding binding death benefit nominations generally do not apply to SMSFs. However, despite some comments suggesting tacit approval of this view, the Court did not expressly endorse the ATO's view.
Consequently, the uncertainty in this area will continue to confront SMSF members and trustees (and their advisors) until a Court makes a binding determination on this issue — as opposed to the ATO:
- which, while regulating SMSFs, is not directly involved in disputes concerning the payments of death benefits; and
- the opinion of which is not determinative.
Until a court does decide on the issue, SMSFs members and trustees should continue to adopt a cautious and conservative approach to binding death benefit nominations.
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.
More Cleardocs information on death benefits etc. for SMSFs
You can read an earlier article on the 3 year lapsing issue here.
You can read the ClearLaw article about the more flexible solution available through Death Benefit Agreements — which are binding and do not lapse, here.
Order SMSF related document packages
SMSF Death Benefit Nomination — binding or non-binding
SMSF Death Benefit Agreement — binding and permanent
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