Death benefits

Trustees face BDBN obligation risks

trustees BDBN obligation

Trustees must examine all options when paying a death benefit even where a binding nomination seems clear cut and not open to a challenge.

SMSF trustees have a legal obligation to ensure the correct payment of death benefits even where a binding death benefit nomination (BDBN) may seem to be clear cut and not open to contest and should seek advice if unsure about those requirements, according to superannuation lawyer.

Cooper Grace Ward partner Hayley Mitchell said the work of a trustee went beyond simply executing the contents of a BDBN and extended into whether they were carrying out their role in the correct manner.

“Trustees have a duty to inquire as to whether the binding nomination is in fact valid under the terms of the trust deed,” Mitchell said during a webinar earlier today in which she added that duty also includes checking whether the trust deed and nomination are up to date, and the latter consistent with the deed’s rules.

“If the trustee has not undertaken the process of reviewing the terms of the trust deed and the nomination and simply paid the death benefit they are at risk of being criticized later for making that payment and the decision if they weren’t bound to follow it.

Mitchell said this criticism was likely to come from other interested beneficiaries who believe they should have received the death benefit and may now have a potential claim against the trustee.

“When you think a trustee does not need to exercise discretion they should still go through this formal checklist to ensure everything has been done properly and they are compelled to pay the death benefit under the nomination.

Mitchell added that where a trustee was uncertain about either the trust deed history, including any variations, or about the terms of a BDBN they were required to address that uncertainty before directing the death benefits to a beneficiary.

“The case law tells us the trustee is obliged to seek specialist advice, which may lead them to obtaining an opinion from legal counsel or possibly going to the court for directions if the advice to the trustee is the matter could go one way or the other.

“The trustee has an avenue to ask the court to advise them as to how they should treat the BDBN or how the trustee should proceed with their role.

“That avenue gives the trustee protection and certainty to access an indemnity and cover their costs from the assets of the fund rather than exposing themselves to personal risk.”

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