Death is not something we think about, but it is something that is going to happen to every one of us at some stage.  As an SMSF investor, you’ve worked hard for your nest egg so you want to ensure when you do pass from this life that your hard earned savings are left to the right people. You can make sure that your SMSF benefits are divided according to your wishes with a binding nomination.

A binding nomination over-rides the trustee’s discretion to pay out a death benefit to your dependents as they see fit. The binding nomination requires that the trustee act in accordance with your wishes. Under subsection 59 (1A) of the Superannuation Industry Supervision Act 1993 (SISA), a binding nomination is not compulsory for an SMSF but if you do have one in your SMSF, then the trustees of your SMSF must follow the instructions as stated in the binding nomination.

For a nomination to be binding, you must nominate that your superannuation death benefit is to be paid to either your dependants or to your estate in accordance with regulation 6.17A of the Superannuation Industry (Supervision) Regulation 1994.

If you make a binding nomination instruction that the trustees of your SMSF must pay your death benefit to your estate, then the executor of your estate will pay out your superannuation savings according to the terms of your will.

A binding nomination is valid when two witnesses (aged 18 years or over) sign the nomination document confirming that the contents of the document reflect your wishes.  You cannot use witnesses who may benefit from your nomination. 

Normally, a binding nomination has to be renewed every three years or it will lapse. As binding nominations are not compulsory in an SMSF, SMSFs are able to offer non-lapsing or lapsing binding nominations, depending on the SMSF’s trust deed.  However, if you divorce, re-marry or have children, you need to make sure you update your nominated beneficiaries to reflect your new circumstances.

If no binding nomination is made, then the trustees of your SMSF will use their discretion to distribute your superannuation savings.  Even if you do have a binding nomination, if the nomination form is invalid, because let’s say you left your superannuation savings to your loving pet, then your death benefit will be paid using the trustees’ discretionary powers by the remaining trustees of your SMSF. You can only nominate dependants who are people.

You can also place a non-binding nomination in your SMSF which enables you to advise the trustees of your SMSF of how you wish your superannuation savings to be distributed upon your death.  However, because it is non-binding, it is used as important information for the trustee to consider but the final decision is still at the trustees’ discretion.

If the trust deed of an SMSF allows for payment of a death benefit in the event of a member’s death, then the death benefit can be paid either to the member’s dependants or their legal personal representative.    If the member does not have any dependants, then their death benefit can be paid to their estate.  People who are not classified as dependants of the deceased member can receive a death benefit paid from the member’s estate. 

Gold and Platinum Members read on for the definition of a “dependant” under the Superannuation Industry (Supervision) Act 1993 (SISA) and the Income Tax Assessment Act 1997 (ITAA).

The definition of a “dependant” of a deceased person differs slightly in the SISA and the ITAA.  The SISA excludes former spouses and the ITAA excludes children over the age of 18 unless they are financially dependent on the deceased.

Under the SISA, a death benefit can be paid to the deceased member’s dependants as a lump sum or as a pension, whereas, non-dependants can only be paid a death benefit as a lump sum (Regulation 6.21).

In essence, the SISA defines the dependent beneficiaries and the type of payments they can receive whereas the ITAA affects the amount of tax payable on the death benefit.

Build these documents now:

• SMSF - Deed Update
• Self Managed Superannuation Fund Deed
• The Self Managed Super Handbook
• Investment Strategy for Self Managed Super 13/14
• Webinar Recording - Investment Restrictions for SMSFs

This article was prepared by Monica Rule. Monica is the author of “The Self Managed Super Handbook – Superannuation Law for Self Managed Superannuation Funds in plain English” (available from Law Central – click here)