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Estate Planning, Strategy

Flexible BDBNs more advantageous than wills

BDBN SMSF will

Flexible binding death benefit nominations (BDBN) in an SMSF are better tools for directing wealth to beneficiaries than superannuation within a will.

SMSFs can create binding death benefit nominations (BDBN) that are conditional, cascading and contingent on events and more useful in dealing with family-related matters than a will, according to a specialist SMSF compliance and documentation firm.

SuperCentral superannuation and estate planning special counsel Brian Hor said it was legally possible to create a BDBN that had all of the above features and the rules for creating them can be found in existing determinations and regulations.

Hor pointed out paragraph one of ATO SMSF Determination (SMSFD) 2008/3 stated the “governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in regulation 6.17A of the SISR (Superannuation Industry (Supervision) (SIS) Regulations 1994)”.

“So the terms of BDBNs for SMSFs, and whether they can be non-lapsing, contingent, cascading, conditional and/or unconditional, are not prescribed by legislation and can be set out in the SMSF deed,” he added as part of a recent blog post.

He said paragraph two of the same determination stated a death benefit nomination was not binding on a trustee where it nominates a person who cannot receive a benefit under the operating standards of the SIS Regulations.

“This means that you do need to have regard to particular provisions of the SIS rules to ensure that the BDBN remains binding,” he said.

He pointed out paragraph eight of SMSFD 2008/3 makes reference to regulation 6.22 of the SIS Regulations, which, in turn, specifies the range of people who may receive the death benefits of a member of a regulated superannuation fund, and in some cases the benefits may only be paid to a member’s legal personal representative or one or more of their dependants.

“Note that it is essential to review the SMSF trust deed to ensure that it allows the making of such tailored BDBNs,” he said.

He pointed out an SMSF trust deed may require updating to allow the making of a conditional BDBN, prevent subsequent amendments to the deed from overriding an existing BDBN without the express consent of the relevant fund member, and prevent the member’s attorney under an enduring power of attorney from amending or revoking the BDBN.

Taken collectively, these regulations create a number of advantages when using conditional BDBNs, including the superannuation benefit is kept at an arm’s-length distance from any disputes, he said.

He warned, however, conditional BDBNs were not automatically revoked on divorce or remarriage and restricted beneficiaries to SIS dependants or an estate.

“As the super death benefit is not dealt with by a will and does not form part of the client’s estate, it will not be subject to a challenge to the estate,” he noted.

“Binding nominations in SMSFs are not subject to challenge in the Superannuation Complaints Tribunal (SCT), since the SCT has no jurisdiction over SMSFs under the Superannuation (Resolution of Complaints) Act 1993.

“It has immediate effect – there is no need, as there is with a will, to obtain probate and wait for administration of estate, which could take up to a year or more.”

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