By Julie Steed, Senior Technical Services Manager

A super fund member dies and the trustee of the fund pays their death benefit to their eligible dependants or to their estate - it may sound simple, and in most cases, it is, but it’s an area which is often misunderstood. You should ensure your clients understand who can and can’t receive their super death benefit and the different types of nominations so they don’t leave a complicated mess behind when they die.

This article explains who a super death benefit can be paid, types of nominations and some of the more common misunderstandings.

Who can your client nominate as a death benefit dependant?

Superannuation law provides that a super death benefit can only be paid to:

  • a legal personal representative (LPR) or
  • a dependant.

A dependant includes:

  • a spouse
  • a child
  • a financial dependant or
  • any person with whom the deceased had an interdependency relationship.

Legal personal representative

The LPR is responsible for ensuring that various tasks are carried out on behalf of the estate for a person who has died. A person may be appointed to the role by being named as the executor in the Will or by being appointed as administrator of the estate by the Supreme Court when there isn’t a Will.

Spouse

A spouse includes:

  • a legally married couple
  • a de facto couple (both same sex and opposite sex).

Child

A child includes:

  • an adopted child, a step-child or an ex-nuptial child of a person
  • a child of a person’s spouse
  • a child within the meaning of the Family Law Act (mainly covering artificial conception).

While a step-child is included in the definition of a child it is important to note that the dissolution of the relationship between the parent and the step-parent severs the step-child relationship. Accordingly, if the natural parent dies or separates from the step-parent, the step-child/parent relationship ceases at that time. The child may, however, still qualify as a financial dependant or under an interdependency relationship.

What is an interdependency relationship?

Two people have an interdependency relationship if:

  • they have a close personal relationship and
  • they live together and
  • one or each of them provides the other with financial support and
  • one or each of them provides the other with domestic support and personal care.

Two people may still have an interdependency relationship if they have a close personal relationship but do not live together owing to disability or temporary absence. Apart from this situation, all four of the interdependency conditions must be met.

The trustee normally has discretion, except when…

Under the rules of a superannuation fund, it is up to the trustee’s discretion to determine who the recipient or recipients are of a member’s death benefit. However, the two exceptions to this rule are member-directed nominations for small funds and binding death benefit nominations.

What are the types of nominations?

When nominating beneficiaries, super funds offer members a range of nomination options which include:

  • member-directed nominations
  • reversionary pensions
  • binding nominations
  • non-lapsing binding nominations
  • nominated beneficiaries.

Member-directed nominations

Self-managed super funds (SMSFs) and small APRA funds (SAFs) are exempt from the provisions of superannuation law which prohibit a person who is not a trustee from exercising a discretion as to who will receive the death benefit.

Clients who are members of SMSFs and SAFs are able to be certain of nominating beneficiaries using a clause in the fund’s trust deed. This type of clause would typically state:

  • if a member nominates a valid dependant, the benefit shall be paid to them
  • if there is no nomination, or the nomination is invalid, the benefit shall be paid to the LPR.

Reversionary pensions

When a pensioner dies, payments from reversionary pensions will go to the chosen reversionary beneficiary. If the reversionary beneficiary dies before the pensioner, the benefit would ordinarily pass to the pensioner’s estate. From 1 July 2017, because of the super reforms, the maximum amount that can revert to a spouse is generally $1.6 million.

These types of nominations generally provide certainty and peace of mind for clients. In most situations, the surviving spouse simply needs to notify the trustee of the death and potentially provide a new bank account number.

Since 1 July 2007, death benefits cannot be paid in the form of an income stream to children over the age of 25 unless they are disabled. Accordingly, adult children cannot generally be nominated as reversionary beneficiaries.

Binding nominations

A binding nomination can provide certainty as to who receives the member’s death benefit. Under this type of nomination, clients can nominate the person(s) to whom their death benefit will be paid. This nomination is an exception to the rule that no-one other than the trustee can exercise a discretion.

Before this exception is granted, under superannuation law, the following conditions must be met:

  • The trustee must give the member sufficient information to understand the nature of a binding nomination.
  • The nomination must nominate a superannuation law dependant.
  • The nomination must be in writing.
  • The nomination must be signed and dated in the presence of two witnesses.
  • The witnesses must be over 18 and not a nominated dependant or LPR.
  • The nomination must be clear and unambiguous.
  • If the nomination is not clear, the trustee must seek clarification as soon as possible.
  • The nomination expires after three years.
  • The nomination may be amended or revoked.

In addition, the fund’s trust deed must also permit binding nominations to be made. If a trustee accepts a nomination that meets the criteria stipulated in superannuation law, the trustee is bound to make the payment in accordance with the nomination.

A binding nomination can never bind a trustee to make a payment to a person who does not meet the definition of a dependant. In this respect, it is important to appreciate what the fund rules are in respect of invalid nominations. Common options are for the benefit to be required to be paid to the LPR or alternatively for the trustee to have complete discretion.

Non-lapsing binding nominations

An alternative to binding nominations are nominations made in accordance with the SIS Act, allowing discretion to be exercised by a party other than the trustee, provided that the governing rules require the trustee's consent to the exercise of such a discretion. The fund’s trust deed must contain specific provisions relating to the non-lapsing nominations.

The rules of some funds may stipulate that certain life events, such as marriage, divorce or the birth of a child will make the nomination invalid. In addition, the nomination may require the member to declare that they will always keep their nomination up to date to reflect any changes in their personal circumstances.

Nominated beneficiaries

A beneficiary nomination is an expression of wishes which is not binding on trustees. As with all other types of nominations, a nominated beneficiary must meet the superannuation law definition of a dependant.

With the exception of SMSFs, once discretion has been exercised as to the intended recipients of the death benefit, the trustee is required to undertake a claim staking process to identify potential beneficiaries and inform them of their intentions as to how the benefit will be distributed.

Potential beneficiaries include anyone who meets the superannuation law definition of dependant. The potential beneficiaries have 28 days to object to the trustee’s intention. If a potential beneficiary objects to the intended distribution, the trustee must obtain further information about the potential beneficiaries’ level of dependency, reassess their decision and re-commence the claim-staking process.

Potential beneficiaries who aren’t satisfied with the trustee’s decision may lodge a formal complaint through the fund’s internal complaints process, and if they are still not satisfied, they can refer their complaint to the Superannuation Complaints Tribunal.

Common problems for clients

Issues often arise when clients nominate people who do not meet the definition of a dependant. Although super funds go to considerable effort to explain the nature of superannuation death benefits and the legislative requirements, many members continue to nominate people who don’t meet the definition.

A typical example is where a client wants to nominate their parents to be the recipients of their death benefit, however, they are not living with their parents nor are they providing them with financial support. In this case, the trustee would not be able to make the payment to the member’s parents because they do not meet the superannuation law definition of dependant. In this instance, the member would need to prepare a Will and direct the superannuation to the LPR.

The goal for your client is certainty

Ensuring your client clearly understands who a death benefit can be paid to is essential to make sure their super death benefits are distributed as they intend.

In retail, corporate or industry super funds, certainty can be achieved by completing binding nominations or reversionary pensions. The most certain outcome for SMSFs and SAFs is to include the requirement to pay a nominated dependant in the fund’s trust deed.

Your clients should review their death benefit nominations so their intentions are realised and no issues arise later when it’s too late to easily remedy.

For more information, please contact call a member of our Estate Planning Team on 1800 882 218.

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