Estate Planning

Legal weight behind BDBN validity exemptions

BDBN validity exemptions

Four separate court cases have now confirmed SMSF BDBNs are not covered by super laws regarding witness numbers and validity periods.

A series of legal cases has served to confirm a binding death benefit nomination (BDBN) for an SMSF does not need to comply with rules relating to the number of independent witnesses and validity periods in order to be a valid nomination, a legal expert has claimed.

SuperCentral self-managed superannuation executive consultant Michael Hallinan said the case of Hill v Zuda Pty Ltd [2021] WASCA 59 was the fourth case to affirm that, unlike retail and industry superannuation funds, SMSFs were not bound by super rules in this area.

“There has been a continuing legal controversy as to whether BDBNs for SMSFs must, in order to be valid, comply with both the two independent witness rule and three-year validity period rules,” Hallinan said.

“There is no controversy as to whether these rules apply for BDBNs in industry and retail superannuation funds: they do.

“The outcome of this controversy [for SMSFs] may dramatically affect the allocation of death benefits and also may frustrate carefully constructed estate planning arrangements.”

He said there have been two views in regards to this issue and neither of the rules apply to SMSFs unless they were incorporated into the trust deed of the fund or they do apply to SMSFs by force of the superannuation legislation and their inclusion in a trust deed was irrelevant.

This issue was tested again in the Hill v Zuda Pty Ltd case, in which one party set out to prove three previous cases – Munro v Munro [2015] QSC 61, Re Narumon Pty Ltd [2008] QSC 185 and Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122 – in which it was ruled the two witness and three-year validity rules did not apply to SMSFs, were wrongly decided, he noted.

He said Munro v Munro was decided on the basis that section 59(1) of the Superannuation Industry Supervision (SIS) Act, which outlines the witness and validity period requirements, did not apply to SMSFs and this reasoning was applied in the two other cases.

When section 59 was raised in Hill v Zuda Pty Ltd, including a 1999 amendment that clarified the terms of operation for a BDBN in a retail or industry fund, the court rejected its application to SMSFs, he said.

“The section 59 argument was that the true effect of the 1999 amendment was to modify both the carve-out for SMSFs, as well as modifying the requirement as it applied to BDBNs in industry and retail superannuation funds,” he said.

“This argument was rejected at both first instance and on appeal: the modification does not apply to SMSFs as the modification is of a general provision which only applies to industry and retail funds.

“Simply stated, the weight of judicial case law is that the two witness and the three-year rules do not apply to BDBNs made for SMSFs unless the trust deed of the SMSF self-possesses those rules – whether by expressly setting out those rules in the trust deed or by incorporating those rules.”

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