The status of binding death benefit nominations (BDBN) being the most suitable vehicle to direct death benefits to different beneficiaries compared to pension documents has been confirmed by the recent decision in the Hill v Zuda case, according to an SMSF legal expert.
DBA Lawyers special counsel Bryce Figot said the ruling in the case that SMSF BDBNs were not subject to Superannuation Industry (Supervision) (SIS) Regulation 6.17A also addressed the issue of whether a BDBN was more suitable than pension documents for estate planning.
“Hill v Zuda tells us that if regulation 6.17A does not apply to SMSFs, then what does apply? Well, the deed applies and whatever the deed says,” Figot said during a recent webinar.
He said questions around the use of BDBNs and pension documents typically stem from issues related to how to direct benefits from the accumulation and pension accounts of an SMSF to different beneficiaries that were encountered by advice practitioners.
He gave the example of an account-based pension reverting automatically upon death to the member’s partner and the accumulation account going to the member’s estate, but this was likely to create conflict.
“Some advisers assume that if the pension documents say the pension automatically reverts upon the client’s death to the widow or widower, then that reversion occurs instantly upon death, and thus the BDBN only has the accumulation interest to operate in respect of, and then they arrange for that sort of documentation,” he said.
“The problem with doing that is if the estate or someone is holding a document from the deceased that says ‘Dad or Mum left these documents saying 100 per cent will go to me from their SMSF, but I’m not getting 100 per cent’, that is just inviting a dispute.
“How do you address this? Have a tailored BDBN which states the pension reverts to the spouse and any other interest is paid to the estate,” he said, adding that under this structure a BDBN can override a pension and make the latter reversionary midstream.
Figot also noted that a BDBN allows a member to make rapid changes to pension beneficiaries in the event of a change in family circumstances such as a marital breakdown.
“If the BDBN overrides any pension documents this is easy to do by getting a template BDBN which states when I die [my pension benefits] go to my child, my estate, whoever, and you sign it.
“If the pension documents overwrite the BDBN you would have to try to stop and restart a pension which is infinitely easier said than done.”
