SMSF members who have good relationships with their spouse and children may benefit from not using binding death benefit nominations (BDBN) to manage their death benefits, and instead choose a more flexible option over the certainty of a binding arrangement, an SMSF legal expert has pointed out.
SuperCentral superannuation and estate planning special counsel Brian Hor said a number of court cases related to the use of BDBNs within an SMSF had increased the focus on ensuring those arrangements were “unassailable”, but this might not be necessary with some families.
“What if the client’s family is not one which is racked by internal division and bitterness and strife, but is actually a close-knit family in which each member can trust the other members of the family to have each other’s best interests at heart and who are more inclined to honour and respect their parents’ wishes rather than not?” Hor said in an update on the firm’s website.
He added this was more likely to take place in a “traditional non-blended family” where there would be no conflicts of interest between children of different relationships and their respective step-parents.
“In fact, it is often the case that a couple in such a relationship simply wish to give everything to each other outright, knowing and trusting that the survivor of them will do the right thing for their children,” he said.
He said in these cases the “binding shackles of certainty are the last thing the couple would want to impose on each other” and rather than opting for a BDBN, the couple make no nomination at all.
This type of arrangement was more flexible in the handling of death benefits by a surviving spouse both within and outside the SMSF because, without a BDBN, the SMSF could act as a special kind of discretionary family trust, he pointed out.
He said while the trust was limited by its tax concessions as to who could be a member or trustee, what investments it could make and who could contribute to the fund, the surviving spouse as remaining trustee, or director of the trustee, could allocate a deceased partner’s death benefit to themselves, their children and/or to the deceased partner’s estate with minimal negative tax outcomes.
“Such flexibility can also mean that liquidity issues as regards the payment of a death benefit can be more easily managed as the surviving spouse being the remaining trustee/director can strike the optimal balance between paying out a lump sum, a pension or a combination of both from a fund liquidity perspective,” he said.
He added the lack of a BDBN was also useful where a family expanded over time to include grandchildren or great-grandchildren.
“By not putting into place a BDBN (especially a non-lapsing one), there is the ability for the surviving spouse trustee/director to direct superannuation death benefits to the estate of the deceased partner so as to be able to benefit those grandchildren and great-grandchildren through the terms of the deceased partner’s will, where such persons otherwise could not receive a benefit directly from the SMSF,” he said.
“So, at the end of the day, when considering the structuring of death benefits for a client, and of course depending on the specific circumstances of the client’s family, it may just be that the potential benefits of flexibility will outweigh the comfort of certainty.”