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?Kate Hocking
This article sets out what happens for an SMSF member &mdash using Cleardocs documents &mdash who dies with both of the following in place:
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:
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.
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):
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:
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:
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 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 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.
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.
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).
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.
The difference between a Death Benefit Notice and a Death Benefit Agreement is explained in this table:
Expiring or "permanent"
Death Benefit Nomination
A non-binding Nomination last until revoked or replaced
Death Benefit Agreement
Always permanent until the member revokes or replaces the Agreement
For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Superannuation Team.
You can read earlier ClearLaw articles on a wide range of SMSF topics here.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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.