Self-Managed Superannuation Funds (SMSFs) are an increasingly prevalent component of a client’s estate planning. One of the tools people use to construct an estate plan are Binding Death Benefit Nominations (BDBNs). BDBNs ensure that your superannuation benefits are distributed in accordance with your wishes after your death. That is, they bind the trustee of your superannuation fund to distribute your entitlements to superannuation as you direct.
However, BDBNs are only of use if they are valid. The courts have ruled that BDBNs that distribute entitlements from an SMSF must comply with the SMSF deed. Thus, if the BDBN does not follow the SMSF deed to the letter, it is at risk of being contested which will endanger your wishes.
Below are five tips (or traps) for ensuring that your BDBN is valid with respect to an SMSF. You will notice they all have one thing in common – comply with the SMSF deed.
- Use the current SMSF deed
It is common for SMSF deeds to be updated; thus, you must be certain that the BDBN has been prepared pursuant to the current SMSF deed and not a former deed, as the deed sets out the requirements for preparing a BDBN. If you use a former deed the BDBN will not be valid.
Similarly, you must be certain that the trustee of the SMSF is the existing trustee. For example, the trustees of the SMSF may be the Members of the SMSF initially and then changed to a corporate trustee at a later date. Clearly, if the BDBN is prepared referencing the wrong trustee then it may not be valid.
- Use the correct BDBN form
Many SMSF deeds have a BDBN form set out in a schedule of the SMSF deed. If so, use it. Do not prepare your own.
- Use the correct terminology
Obviously, the beneficiary named in the BDBN must be eligible pursuant to the Superannuation Industry (Supervision) Act and Regulations e.g.: spouse, child, legal personal representative. However, the beneficiary must also be an eligible recipient pursuant to the terms of the SMSF deed.
For example, if the trust deed states that an eligible recipient is the “Legal Personal Representative” then use this wording on the BDBN. Don’t refer to this beneficiary by another title such as the “trustee of the deceased estate” as occurred in the Queensland case of Munro v Munro  QSC 61. If you do, the BDBN will not be valid.
- Further obligations of the trustee and members
Do the terms of the SMSF deed require the trustee to take action? Does the fund member need to take any further action other than completing the BDBN?
The trustee may have to provide information to the fund member, approve the BDBN form, formally accept a completed form and acknowledge receipt of the BDBN that was given to them by the fund member.
Ensure the obligations of the trustee have been met or the BDBN will not be valid. This may include the preparation of trustee resolutions and other documentation to confirm the trustee has received and accepted the BDBN and a letter from the fund member to the registered office of a corporate trustee to confirm the fund member notified the trustee that they had made a BDBN.
- Superannuation Industry (Supervision) Act
Many SMSF deeds state that BDBNs are to be prepared using the formalities contained in the Superannuation Industry (Supervision) Act and Regulations. If this is the case then, clearly, the BDBN must be in the legislative form i.e.: in writing, two witnesses, signing declaration.
Ultimately, what you are complying with is the SMSF deed. A SMSF BDBN does not have to comply with the legislative regime; it can take its own form. However, if the SMSF deed imports the legislative formalities then you must comply with them to prepare a valid BDBN.
As you can see, the common theme in all the above requirements is to comply with the SMSF deed. It is the trust deed that governs the requirements for a BDBN in an SMSF.