SMSF Pension v Death Benefit Agreement or Death Benefit Nomination: who wins?

If a self managed superannuation fund (SMSF) member dies and they have both a reversionary pension in place and a Death Benefit Agreement or a Death Benefit Nomination (binding or non-binding), then which takes priority?

 

Overview

This article sets out what happens for an SMSF member &mdash using Cleardocs documents &mdash who dies with both of the following in place:

  • a pension that names a reversionary beneficiary; and
  • a death benefit arrangement &mdash it can be either a Death Benefit Nomination (binding or non-binding) or a Death Benefit Agreement (see the end of this article for an explanation of the difference.)

To determine which of the arrangements takes priority, you must follow the terms of the relevant documents. The documents could include one or more of the following:

  • an SMSF deed;
  • a Death Benefit Notice;
  • a Death Benefit Agreement; or
  • a Pension Payment Agreement.

Further, all of these documents should be considered alongside the member's will so that you have the full picture: this is because a death benefit arrangement may direct the trustee to pay super benefits into the deceased's estate and those benefits will then be dealt with in accordance with the terms of the will.

To confirm the position for a particular member, you should seek legal advice.

The general position

If Cleardocs documents are in place, then generally the following arrangements apply.

If the Member has a Pension Payment Agreement that names a reversionary beneficiary, then after the member dies, the trustee must pay the pension to the reversionary beneficiary named in the schedule of the Pension Payment Agreement. So if the reversionary beneficiary is a pension dependant, then any Death Benefit Notice or Death Benefit Agreement has no effect in relation to that pension.

However, the following factors also need to be considered (and are dealt with below):

  • at the time of the member's death, the reversionary beneficiary must be a "pension dependant" (explained below) of that member;
  • what happens when the reversionary beneficiary dies;
  • there may be no reversionary beneficiary named in the Pension Payment Agreement; and
  • superannuation benefits other than those funding payment of the pension.

What is the meaning of a "pension dependant"?

The meaning of a "pension dependant" is best understood by first considering the meaning of "dependant" and then adding the meaning of "pension dependant". Here goes.

To be classified as 'dependant' under section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), the person must be in an 'interdependency relationship' with the member, or be the member's spouse or child. Two people, whether related or not, are treated as being in an 'interdependency relationship' if:

  • they have a close personal relationship; and
  • they live together; and
  • one or each of them provides the other with financial support; and
  • one or each of them provides the other with domestic support and personal care.

To be classified as a 'pension dependant' and as a result be entitled to receive a pension on the death of a member, you must not only be a 'ependant' but also, in the case of a 'dependant' who is a child of the deceased, be:

  • less than 18 years of age; or
  • be 18 or more years of age and less than 25 years of age and be financially dependant on the member; or
  • have a disability of the kind described in subsection 8(1) of the Disability Services Act 1986.

What if the reversionary beneficiary is not a "pension dependant"?

If at the time of the member's death, the reversionary beneficiary is not a "pension dependant" (explained above) of that member and the member has a valid Death Benefit Notice or Death Benefit Agreement, then the trustee must follow the instructions in that Notice or Agreement.

If the member does not have a valid Death Benefit Notice or Death Benefit Agreement, then the trustee must deal with the member's account in accordance with the SMSF deed and superannuation law. Generally, under the Cleardocs documents, this would require the trustee to pay or apply the relevant benefits in the way the trustee thinks fit, in accordance with the following rules:

  • If the member or beneficiary has left dependants, then the trustee must pay or apply the benefit to or for the benefit of any one or more of the dependants of the member or beneficiary and the legal personal representatives of the member or beneficiary. The trustee may do so in any proportions the trustee thinks fit and may take into account a member's wishes contained in a non-binding nomination form.
  • If the member or beneficiary has not left any dependants but does have a legal personal representative, then the trustee must pay the benefit to the legal personal representatives of the member or beneficiary.
  • If the member or beneficiary has not left any dependants and has no legal personal representative, then the trustee may pay or apply the benefit to or for the benefit of any individual at the trustee's discretion. The trustee may do so in any proportions the trustee thinks fit.
  • If the trustee has not paid or applied the benefit to or for the benefit of any person described above, then the trustee must treat the benefit as a forfeited benefit entitlement.

What happens when the reversionary beneficiary dies?

If permitted by the trustee, the reversionary beneficiary may &mdash once they have started receiving the pension &mdash give the SMSF trustees a written Death Benefit Notice specifying which of the beneficiary's dependants is to receive their account balance on their death. The Death Benefit Notice must be in accordance with superannuation law. If the reversionary beneficiary has done that, then the trustee must pay the account balance in accordance with the reversionary beneficiary's Death Benefit Notice.

If the reversionary beneficiary does not have a Death Benefit Notice, then the reversionary beneficiary's account is dealt with in accordance with the SMSF deed and superannuation law. Generally, under the Cleardocs documents, this would require the trustee to pay or apply the relevant benefits in the way the trustee thinks fit, in accordance with the following rules:

  • If the member or beneficiary has left dependants, then the trustee must pay or apply the benefit to or for the benefit of any one or more of the dependants of the member or beneficiary and the legal personal representatives of the member or beneficiary. The trustee may do so in any proportions the trustee thinks fit and may take into account a member's wishes contained in a non-binding nomination form.
  • If the member or beneficiary has not left any dependants but does have a legal personal representative, then the trustee must pay the benefit to the legal personal representatives of the member or beneficiary.
  • If the member or beneficiary has not left any dependants and has no legal personal representative, then the trustee may pay or apply the benefit to or for the benefit of any individual at the trustee's discretion. The trustee may do so in any proportions the trustee thinks fit.
  • If the trustee has not paid or applied the benefit to or for the benefit of any person described above, then the trustee must treat the benefit as a forfeited benefit entitlement.

What if no reversionary beneficiary is named in the Pension Payment Agreement?

If a reversionary beneficiary is not named in the pension document and the member has a valid Death Benefit Notice or Death Benefit Agreement, then the trustee must follow the instructions in that Notice or Agreement.

What if the member has both a Death Benefit Agreement and a binding Death Benefit Nomination?

In these circumstances, the Death Benefit Agreement prevails over any binding Death Benefit Notice (and any Non-binding Nomination Form). This means that the trustee must pay, or apply, the relevant benefit in accordance with the rules set out in the Death Benefit Agreement.

What if there are other superannuation benefits?

Don't forget that this article deals only with what happens to a pension being paid to the member/beneficiary.

The member may also have other super benefits still in accumulation phase. Any death benefit arrangement will still be relevant to these benefits (even if they're not relevant to the pension).

How are pension payments to children to be treated?

If the pension is paid to a child of the member or of the later reversionary beneficiary, then the pension must be cashed to a lump sum &mdash unless on the day it is to be cashed, the reversionary beneficiary has a disability of the kind described in section 8(1) of the Disability Services Act 1986.

What is the difference between a Death Benefit Notice and a Death Benefit Agreement?

The difference between a Death Benefit Notice and a Death Benefit Agreement is explained in this table:

Option

Binding or

non-binding

Expiring or "permanent"

Death Benefit Nomination

Member chooses

A non-binding Nomination last until revoked or replaced
A binding nomination expires by law after 3 years. (There is some controversy about this point. You can read an article here by our lawyers at Maddocks about why they believe the three year limit applies.)

Death Benefit Agreement

Always binding

Always permanent until the member revokes or replaces the Agreement

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.

More Cleardocs information on related topics

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

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