Contents
- What are the options for paying superannuation death benefits?
- What are the options for paying death benefits from a SMSF?
- What situations can BDBNs be tailored to address?
- Advantages of Using Conditional BDBNs
- Disadvantages of Using Conditional BDBNs
The information in this document is general information only and cannot be relied upon as a substitute for professional advice. No action should be taken until (and we will not be liable to anyone unless) we have provided specific advice relevant to the particular circumstances.
1. What are the options for paying superannuation death benefits?
When it comes to superannuation death benefits, the accepted wisdom has been:
- You can only pay out to a “SIS dependant” or to the estate;
- All you can do is pay a lump sum or (in some circumstances) pay a pension which may be reversionary;
- Options for estate planning are therefore more limited for superannuation death benefits than for other assets, which can be dealt with via your Will and distributed to anyone and in any manner you choose.
Therefore, if you want more flexibility than this, you need to make a BDBN to your estate and then say what you want in your Will – especially if you want to do anything special such as:
- Create a life estate;
- Cater for a “blended family” situation by creating a trust that gives your current spouse access to income but reserves access to capital (either concurrently or after your spouse dies or re-marries) to your children of a previous relationship;
- Impose any special conditions or restrictions, such as in relation to age, occupation or marital status of a beneficiary;
- Provide for various contingencies, such as one person or class of persons only receiving an inheritance if another person or class failed to survive you;
- Provide for certainty in how your superannuation is dealt with (especially after the Katz v Grossman case, which was the strongest argument for making a BDBN to your estate and putting in place an up to date Will);
- Provide for asset protection of inheritances, flexibility and access to significant tax concessions for minor beneficiaries via a Testamentary Discretionary Trust (TDT).
You can’t do any of this with your SMSF, can you? Or can you?
2. What are the options for paying death benefits from a SMSF?
Well, you can if you have a SMSF trust deed which permits you to make a Death Benefit Nomination which is:
- Conditional;
- Cascading;
- Contingent; and/or
- Even Discretionary.
But is that legally possible? Consider:
(a) SMSF Determination SMSFD 2008/3, para 1: “the governing rules of an SMSF may permit members to make death benefit nominations that are binding on the trustee, whether or not in circumstances that accord with the rules in regulation 6.17A of the SISR”.
(So the terms of BDBNs for SMSFs (and whether they can be non-lapsing, contingent, cascading, conditional and / or unconditional) are not prescribed by legislation and can be set out in the SMSF Deed.)
(b) SMSFD 2008/3, para 2: “However, a death benefit nomination is not binding on the trustee to the extent that it nominates a person who cannot receive a benefit in accordance with the operating standards in the SISR”.
(This means that you do need to have regard to particular provisions of the SIS rules to ensure that the BDBN remains binding.)
(c) SMSFD 2008/3, para 8: “Regulation 6.22 of the SISR specifies the range of persons in whose favour the death benefits of a member of a regulated superannuation fund may be cashed. Death benefits may, subject to certain limited exceptions, only be paid to a member’s legal personal representative or one or more of the member’s dependants”.
(d) SIS Reg 6.22:
“(1) … a member’s benefits in a regulated superannuation fund must not be cashed in favour of a person other than the member or the member’s legal personal representative:
(a) unless:
(i) the member has died; and
(ii) the conditions of subregulation (2) or (3) are satisfied…
(2) The conditions of this subregulation are satisfied if the benefits are cashed in favour of either or both of the following:
(a) the member’s legal personal representative;
(b) one or more of the member’s dependants.”
Note – that it is essential to review the SMSF trust deed to ensure that it allows the making of such tailored BDBNs. The trust deed may require updating in order to:
- specifically authorise or allow the making of a conditional BDBN;
- prevent a subsequent amendment to the SMSF trust deed from overriding an existing BDBN without the express personal consent of the relevant fund member;
- prevent the member’s attorney under an enduring power of attorney from amending or revoking the BDBN (since a BDBN is not actually a testamentary document like a Will).
Let’s look at some examples of what might be possible:
2.1 Conditional BDBN
Your clients, wealthy Asian property development entrepreneurs Homer and Marge, are very concerned about their 18 year old son Bart who lives in the lap of luxury and hasn’t bothered to seek higher education after completing his stint at high school at the posh Springfield Private. His friends there have all gone on to university to study to become doctors, dentists and lawyers (that “holy trinity” of occupations which all Asian parents hope their children will aspire to). Luckily they also have two daughters Lisa and Maggie who whilst being still at school are already showing signs of great things to come (Lisa’s favourite toy is her stethoscope, and Maggie loves watching re-runs of “Boston Legal” on TV).
Homer and Marge have the vast bulk of their wealth in their SMSF, with roughly equal sized member accounts. They want to treat their children equally, but at the same time they want to give Bart an incentive to better himself, rather than just wait around for his inheritance. Their estate planning lawyer said that the only way to achieve this is for Homer and Marge to each make a BDBN to their estates, and in their Wills they can impose conditions upon Bart which must be satisfied before he can take his inheritance. However, there are two problems with this strategy. On the one hand, the lawyer did warn them that if Bart felt that the restriction was unfair, he could challenge the Will and may be able to by-pass it anyway. Second, as is common to Asian culture, Homer and Marge are very superstitious and do not want to put any Wills in place in case something happens to them after they sign them. What can you do as their adviser?
Luckily you read through and notice that their SMSF trust deed is one which allows them to make a BDBN that is not subject to any of the restrictions under the SIS rules. You suggest that they each make a BDBN as follows:
“I direct that on my death my superannuation death benefit is to be divided equally between my three children Bart, Lisa and Maggie as lump sums
PROVIDED HOWEVER that if at the date of my death Bart has not qualified for practice as either a doctor, a dentist or a lawyer then I direct that my superannuation death benefit is to be divided equally between my two daughters Lisa and Maggie as lump sums.”
2.2 Contingent BDBN
But, argues Marge, what if one of our children has predeceased us? We want to make sure that the surviving children will take over their share. You then suggest amending the BDBN to take into account this contingency, as follows:
“I direct that on my death my superannuation death benefit is to be divided equally between SUCH OF my three children Bart, Lisa and Maggie who survive me by 30 days as lump sums
PROVIDED HOWEVER that if at the date of my death Bart has so survived me but has not qualified for practice as either a doctor, a dentist or a lawyer then I direct that my superannuation death benefit is to be divided equally between SUCH OF my two daughters Lisa and Maggie who survive me by 30 days as lump sums.”
2.3 Cascading BDBN
Then Homer raises a very important issue – shouldn’t we only give the money to our kids after we both die first? So you then make a further amendment to the BDBN so as to ensure that Homer’s and Marge’s super death benefit is initially to be paid to the survivor of them, and only on the death of the survivor then the survivor’s super death benefit is to go to the children:
“I direct that on my death my superannuation death benefit is to be paid as to 100% to my husband Homer / wife Marge as lump sum if he / she survives me by 30 days
PROVIDED HOWEVER that if my said husband / wife fails to so survive me THEN I direct that on my death my superannuation death benefit is to be divided equally between SUCH OF my three children Bart, Lisa and Maggie who survive me by 30 days as lump sums
PROVIDED FURTHER that if at the date of my death Bart has so survived me but has not qualified for practice as either a doctor, a dentist or a lawyer then I direct that my superannuation death benefit is to be divided equally between SUCH OF my two daughters Lisa and Maggie who survive me by 30 days as lump sums.”
2.4 Discretionary BDBN
You as the adviser then point out that each of Homer and Marge has a life insurance policy outside of super. Each of them nominates the three children as beneficiaries, but in varying proportions which are different between each of Homer and Marge. Homer and Marge want to ensure that as far as is possible each of the children will receive overall an equal split of their life insurance proceeds and super death benefits, but are not sure how to do this.
You then suggest that the trustee of the super fund be given a discretion to work out what amount to pay each of their children based on the proceeds of the life insurance policies received by them:
“I direct that on my death my superannuation death benefit is to be paid as to 100% to my husband Homer / wife Marge as lump sum if he / she survives me by 30 days
PROVIDED HOWEVER that if my said husband / wife fails to so survive me THEN I direct that on my death my superannuation death benefit is to be divided between SUCH OF my three children Bart, Lisa and Maggie who survive me by 30 days as lump sums where the amounts of my superannuation death benefit paid to each of my said children shall be as determined in the discretion of the Trustee having regard to the extent to which each of my said children has received the proceeds of any life insurance policies paid on the deaths of myself and my said husband / wife so as to ensure as far as is practicable that my said children will each receive an equal share of the total overall sum of the amounts of such proceeds of life insurance policies and my superannuation death benefit
PROVIDED FURTHER that if at the date of my death Bart has so survived me but has not qualified for practice as either a doctor, a dentist or a lawyer then I direct that my superannuation death benefit is to be divided between SUCH OF my two daughters Lisa and Maggie who survive me by 30 days as lump sums where the amounts of my superannuation death benefit paid to each of my said daughters shall be as determined in the discretion of the Trustee as aforesaid.”
3. What situations can BDBNs be tailored to address?
3.1 “Blended family” situations
What if you want to look after your current spouse but on their death or re-marriage ensure that your super death benefit goes to your own children of a previous relationship?
George and Marsha are currently married to each other but George has had a previous relationship and has 3 adult children Tom, Dick and Harriet from his previous relationship.
Both are in the same SMSF, but George’s balance is significant large than that of Marsha. Both are over 60 years old and in pension mode.
If he dies first, George wants to look after Marsha for the rest of her life (or until she remarries), but then ensure that his children benefit from his estate.
George’s financial adviser suggested that he might make his super pension reversionary to Marsha to provide her with a tax-free income stream. However, on her death, she cannot make a BDBN in favour of George’s children as they are not her SIS dependants. She would therefore need to make a BDBN to her estate, and in her Will she would need to state that the super proceeds would go to George’s children.
However, George’s lawyer points out that Marsha could potentially change her Will after George’s death to exclude George’s children as beneficiaries, e.g. if she re-married her new spouse may persuade her to give everything to him instead. It would therefore be preferable if there was a way that George could implement his intentions in a way that did not rely on having to trust Marsha to do (or not do) something.
George’s lawyer and financial adviser then get together and (having first checked the SMSF trust deed to ensure it contained the appropriate power) decide that George should put into place a conditional BDBN in relation to his super interest as follows:
“I direct that on my death my superannuation death benefit is to be dealt with as follows and in the following order:
- should my spouse Marsha survive me by 30 days, then my superannuation death benefit shall be used to pay to her a non-commutable allocated pension (in respect of which the total amount of payments made each year are not to exceed the amount which would enable such pension to continue for the remainder of her life expectancy calculated as at the date of my death) and in this regard such pension is to continue until the earlier of Marsha’s death or her entering into a spousal relationship (whether legal or de facto) with any other person;
- should my spouse Marsha fail to survive me by 30 days, or upon Marsha’s death or her entering into a spousal relationship, then I direct that my superannuation death benefit is to be divided equally between such of my three children who survive me by 30 days as lump sums.”
George’s lawyer notes that two of George’s children already have children of their own. George’s lawyer suggests to George that George could put into place a Will containing a Testamentary Discretionary Trust which includes each of George’s children, grandchildren and further issue as potential beneficiaries, and amending George’s conditional BDBN to say as follows:
“2. should my spouse Marsha fail to survive me by 30 days, or upon Marsha’s death or her entering into a spousal relationship, then I direct that my superannuation death benefit is to be paid to the legal personal representatives of my estate.”
This would mean that George’s super death benefit would go into the Testamentary Discretionary Trust, so that any investment income earned by the trust could be distributed to George’s minor grandchildren in a way that would attract concessional tax treatment in their hands pursuant to section 102AG of the Income Tax Assessment Act 1997 (Cth).
3.2 Maximise “death benefit dependant” concessions
Suppose Marsha has predeceased George, so he now reviews his BDBN. It is noted that one of his children Tom is still living at home with him and is totally financially dependent on him, whilst the other two children Dick and Harriet are living away from home and are financially independent. So the child still living at home with George is still a “death benefits (or tax) dependant” for tax purposes (see ATO ID 2014/22) whilst the other two are not.
George therefore puts into place the following new conditional BDBN:
“I direct that on my death my superannuation death benefit is to be dealt with as follows:
- if my son Tom survives me by 30 days and agrees by an enforceable deed in writing that if he is paid 100% of my superannuation death benefit then he will within 30 days divide it in equal shares between such of himself, my son Dick and my daughter Harriet as survive me by 30 days, then after receipt of such deed by the Trustee of the fund 100% of my superannuation death benefit is to be paid to Tom as a lump sum;
- if my son Tom does not so agree, or he fails to survive me by 30 days, then my superannuation death benefit is to be divided equally between such of my three children Tom, Dick and Harriet who survive me by 30 days in equal shares as lump sums.”
This means that, if scenario 1 above applies, then Tom will receive the whole superannuation death benefit tax free, and then divide it equally between himself and his two siblings. Otherwise if he does not agree to the arrangement, then all three children will receive the super death benefit in equal shares anyway, but tax may be payable in relation to the shares received by the two non-dependant children.
A potential issue is whether or not Part IVA of the Income Tax Assessment Act 1936 might apply in this situation to negate the tax benefit in terms of the saving of any tax on that part of the super death benefit that otherwise would have been paid to non-tax dependants.
Essentially whether or not Part IVA applies will depend on an analysis of whether there is a scheme, an identifiable tax benefit, and identifying a person who has the sole or dominant purpose in entering into the scheme of obtaining the tax benefit for the relevant taxpayer.
Arguably the dominant purpose is simply estate planning, the provision of George’s super death benefits to his three children equally via one of two alternative methods which would each result in his three children receiving a one third share of his super.
To say that George has entered into a scheme for the sole or dominant purpose in entering into the scheme of obtaining a tax benefit in such circumstances is arguably akin to saying that Part IVA could also apply to George deciding to put into place a Will containing a Testamentary Discretionary Trust which would enable income to be paid at concessional tax rates to minor beneficiaries as compared to making a direct gift to his children in his Will.
There are other ATO practices (such as PS LA 2003/12 in relation to the capital gains tax treatment of a trustee of a testamentary trust) that indicate that the ATO take a more generous approach when it comes to dealing with estate planning arrangements.
Nevertheless, there is always the option of seeking a Private Binding Ruling in relation to the ATO’s views on the form of conditional BDBN.
3.3 Estate equalisation
Suppose George owns a farm, and Tom has stayed and lived with George all this time so as to help him work the farm. The farm is the only asset of value in George’s personal estate, and it is worth half of the value of George’s superannuation. Under George’s Will, he wants to leave the farm to Tom. However, this will mean that there will be nothing left for Dick and Harriet in his estate.
George’s lawyers suggests that George put into place the following conditional BDBN:
“I direct that on my death my superannuation death benefit is to be dealt with as follows:
- if my last valid Will gives my farm at 1 Georges Street, Georgeville, NSW to my son Tom, and if each of my children Dick and Harriet have executed a Court approved release of their rights to apply for a family provision order pursuant to section 95 of the Succession Act 2006 NSW, then my superannuation death benefit is to be divided in equal shares between my children Dick and Harriet and paid as lump sums;
- otherwise my superannuation death benefit is to be divided equally between such of my three children Tom, Dick and Harriet who survive me by 30 days in equal shares as lump sums.”
Therefore, if the condition is satisfied, Tom ends up with the farm under George’s Will, and Dick and Harriet share the super death benefit equally, and each child has received an equal share of George’s overall wealth.
4. Advantages of Using Conditional BDBNs
(a) As the super death benefit is not dealt with by Will and does not form part of the client’s estate, it will not be subject to a challenge to the estate – although it may still be subject to the “notional estate” provisions under the Succession Act 2006 NSW as arguably a failure to nominate your estate as the beneficiary under a BDBN may constitute a “relevant property transaction” for the purposes of s 76(2) or (3) thereof;
(b) Binding nominations in SMSFs are not subject to challenge in the Superannuation Complaints Tribunal (since the SCT has no jurisdiction over SMSFs under the Superannuation (Resolution of Complaints) Act 1993);
(c) It has immediate effect – there is no need (as there is with a Will) to obtain probate and wait for administration of estate, which could take up to a year or more;
(d) They can be used to create tax effective income streams within an asset protected environment to provide for intended beneficiaries.
5. Disadvantages of Using Conditional BDBNs
(a) A nomination to a spouse is not automatically revoked on divorce or re-marriage;
(b) Beneficiaries are limited to SIS dependants or your estate – although you can effectively get around this by also having in place a Will containing a Testamentary Discretionary Trust and directing your super death benefit to your estate as the final “fall-back” beneficiary after exhausting all living SIS dependants;
(c) Potentially could be amended or revoked by your attorney under an enduring power of attorney – unless you insert a restriction in the instrument granting the power or even specifying this restriction in the SMSF trust deed.
Note – that it is good practice to ensure that you specify what will happen in the event that any conditions that are imposed in the BDBN are not satisfied.
Brian Hor
Special Counsel
Superannuation & Estate Planning
SUPERCentral
T (02) 8296 6222
Level 9, 65 York St, Sydney NSW 2000
Twitter: @SUPERCentralAU
brian@townsendslaw.com.au
www.supercentral.com.au