SMSF Beneficiary Nominations — keep them current and try to preserve tax free payments

Beneficiary nominations are a crucial part of Australia's superannuation and retirement system. Accurately specifying the beneficiary of superannuation benefits is important, especially, who is to receive the benefits after an SMSF member dies. The governing rules — the deed — of an SMSF may permit an SMSF member to provide the trustee with a binding, or non-binding, death benefit arrangement.

The Cleardocs SMSF deed allows for:

• Non-binding Death Benefit Nominations — which leave the payment of a superannuation benefit on the death of an SMSF member to the trustee's discretion, but give the trustee some guidance;
• Binding Death Benefit Nominations — which direct the trustee who to pay the benefit to, but which lapse after 3 years leaving the payment to the trustee's discretion; and
• Binding Death Benefit Agreements — which bind the trustee and do not lapse. Though the SMSF member can revoke or replace the agreement.

Having the right arrangement in place, and up to date, is crucial to giving effect to the SMSF member's wishes.

It turns out that the US equivalent of our superannuation plans, their 401(k) plans, encounter similar issues about keeping the death benefit arrangements up to date. Kim Saunders, a tax analyst for Thomson Reuters in the US, said a recent US Supreme Court case involved a US$400,000 employer-sponsored retirement account which seems to have ended up in the "wrong" person's hands.

The facts of the case

In the case:

• William owned a superannuation plan
• In 1974, he named his wife Liv as his beneficiary
• The couple divorced 20 years later in 1994.
• As part of the divorce decree, Liv waived her rights to benefits under William's employer-sponsored retirement plans
• However, William never got around to changing his beneficiary designation (nomination) form with his employer
• When William died in 2001, Liv was still listed as his beneficiary
• Therefore the plan paid the US$400,000 to Liv.

The arguments

William's estate sued the plan, saying that because of Liv's waiver in the divorce decree, the funds should have been paid to the estate instead of Liv.

The decision

The US Supreme Court disagreed with William's arguments. It ruled that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree.

The message

One of the important messages from the case was the need to keep beneficiary nominations up to date. Whether it is because of divorce or another life-changing event, beneficiary nominations made years ago can easily become outdated. This basic message applies in Australia too.

Lapsing nominations

Also, in Australia, a binding death benefit nomination ceases to have effect after 3 years from when it was first signed or last confirmed (unless the member revokes it sooner or the fund's rules fix a shorter period)[1].

Preserving tax free advantages

Whatever death benefit arrangements an SMSF member has in place, it is important to keep those arrangements up to date. One good reason to do so is, if possible, to make sure the superannuation death benefits are received tax-free — this advantage can be put at risk by a potential beneficiary's "death benefit dependant" status changing over time (for example, a child turning 18). Therefore, it may be necessary to review a binding death benefit nomination more regularly than every 3 years.

Superannuation, like many things, is not a "set and forget" matter.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a wide range of SMSF topics here.

Order SMSF related document packages

• Set up an SMSF
• Update an SMSF deed
• Set up an SMSF pension
• Arrange SMSF borrowing lending docs:
  • for when the lender is a bank
  • for when the lender is a related party
• Set up an SMSF corporate trustee
• SMSF Death Benefit Nomination - binding or non binding
• SMSF Death Benefit Agreement - binding and permanent

Download

Download a checklist of the information you need to order a document package.

Source: This article was first published in Thomson Reuters' Weekly Tax Bulletin. To subscribe to Weekly Tax Bulletin, or for more information, please

• see http://www.thomsonreuters.com.au/weekly-tax-bulletin/productdetail/9572; or
• contact Thomson Reuters on 1300 304 195 or at LTA.Service@thomsonreuters.com

[1] Reg 6.17A of the SIS Regulations.