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:
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.
The key tips from the case are:
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.
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:
For more information regarding the Cleardocs Death Benefit Agreement please click here
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.
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 validity of the deceased's letter was challenged in court:
The Court had to decide whether the letter constituted a binding or non-binding death benefit nomination.
The relevant provisions of the SMSF deed are:
The Court held that:
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.
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:
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:
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.
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.
SMSF Death Benefit Nomination — binding or non-binding
SMSF Death Benefit Agreement — binding and permanent
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Geoff Musgrove is a partner in the Maddocks Commercial team.
Geoff's principal areas of practice are:
Geoff acts for a wide range of commercial, government, accounting, manufacturing, professional and rural industry clients.
The legal information and commentary on this site is general only. Documents ordered through Cleardocs affect the user's legal rights and liabilities. To assess their suitability for the user, legal accounting and financial advice must be obtained.
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.