The partner of a legal firm has confirmed a binding death benefit nomination (BDBN) can achieve exactly the same result upon the passing of an SMSF member as a reversionary pension.
“A properly worded trust deed and a properly worded binding nomination, provided they work together properly … can mimic a reversionary pension,” Cooper Grace Ward partner Clinton Jackson said during a plenary session at the SMSF Association Technical Day 2020 held last week.
Jackson pointed out a reversionary pension is basically a mechanism to facilitate an automatic payment to a particular beneficiary that is not subject to any decisions made by the SMSF trustees and not subject to any provisions of the trust deed.
“So provided we have a well-worded trust deed and those binding documentation documents worded specifically to make [payment to a specified beneficiary] happen, then we can achieve the same result,” he noted.
He identified this is as a particularly important fact for members wanting to take advantage of the transfer balance cap rules, whereby the beneficiary of a reversionary pension does not have a credit recorded against their transfer balance account for a period of 12 months, as it expands their estate planning options.
In addition, he cited a practical reason why a BDBN might be favoured over a reversionary pension.
“The reason why this is a very good option, and we prefer to use [BDBNs] in some instances over reversionary pensions, is because they are easy to change,” he said.
“Binding nominations are very easy to change and you can do it by following the procedure in the deed.
“If we have a pension in place, and we don’t want to mess with any treatment for Centrelink purposes or healthcare cards or those sorts of things, changing a reversionary pension is a really difficult process and as we’ve said before, it’s not entirely clear [you’ll achieve] the result you’re looking for.”