News 08/09

Super Concepts e-SuperUpdate provides you with technical tips and updates on Self Managed Superannuation Fund topics of interest.

Superannuation death benefits have always been a sensitive issue. These days sorting out who is to receive your superannuation benefits on death can be a difficult task. It is not made any easier for people who are members of blended families, changing relationships, second marriages and same sex couples. For anyone in these situations it is important to ensure the right people receive the right benefit as intended.

It is permissible for your superannuation death benefit to be paid to your dependant and/or your estate on your death. However, it is up to you to decide whether it will be one or more of your dependants and/or your estate that will receive your death benefit. Whether you will be able to nominate a particular party to receive the benefit depends on the trust deed of your fund and the final decision of the trustee.

In some cases the trust deed may allow you as a member of the fund to direct the trustee to pay benefits to dependants at the time of your death and/or your estate. You may require that the trustee follow your instructions, or you may provide the trustee with an option to follow your wishes if it is in the interests of your dependants or the beneficiaries of your estate.

In this edition of e-SuperUpdate we cover many of the questions asked by our clients about nominating who will receive your superannuation death benefit. The current Super Concepts trust deed (0708) provides a range of flexible options to suit your circumstances. If you wish to ensure your trust deed is absolutely up to date then updating to the current Super Concepts trust deed may prove worthwhile. Click here to be directed to the SuperAssist page for further deed upgrade information and the application form.

What is a Death Benefit Nomination?

Just as the name suggests a death benefit nomination allows you to nominate who is to receive your superannuation benefits on your death. The superannuation legislation permits you to have your death benefits paid to your dependants and/or your estate. Depending on the type of nomination permitted under the fund's trust deed you may be able to nominate who is entitled to receive your death benefit , the amount and type of benefit and how much your benficiaries and/or your estate may receive.

The Super Concepts trust deed (0708) provides that the trustee of the fund must allow you to make a beneficiary nomination. You make the nomination by giving the trustee a written notice that any death benefit must be paid to a dependant or dependants and/or your estate as directed.

While there are no restrictions to the form of the nomination, most fall within the following broad categories:

• A lapsing binding death benefit nomination;
• A non-lapsing binding death benefit nomination;
• A non-binding death benefit nomination; and
• A statement of wishes.

When is a Death Benefit Nomination binding on the trustee?

A valid binding death benefit nomination compels the trustee of the fund to pay your death benefit to people who are dependant on you for support and/or your estate at the time of your death. There are two ways in which a binding death benefit nomination can be made - a lapsing binding death benefit nomination and a non-lapsing binding death benefit nomination.

A lapsing binding death benefit nomination lasts for a particular period as stated in the nomination. For example, a binding death benefit nomination can be for two, three or four years or any other period that you nominate. After the period nominated has elapsed you are entitled to renew the nomination on the same terms as the original nomination, or complete a new nomination and provide it to the trustee. During the period nominated it is possible to revoke the notice and provide a new nomination to reflect any circumstances that have changed. One aspect of a lapsing binding death benefit nomination is that it lapses after the period indicated. If circumstances change the trustee is not bound to follow the nomination. The disadvantage is that once the period has lapsed, the trustee is not compelled to follow the election.

A non-lapsing binding death benfit nomination, as the name suggests, does not lapse until you withdraw it. The main benefit of a non-lapsing nomination is that you have the advantage of amending the nomination when circumstances change, rather than remembering to renew the nomination at the end of a particular period. The main disadvantage is that if circumstances change, or are about to change, you may need to amend the nomination.

It is not compulsory for a trustee to follow a non-binding nomination. The main advantage of a non-binding death benefit nomination provides a degree of flexibility as it allows the trustee to act in the best interests of the dependants. The manner in which the death benefit is paid may provide a range of tax advantages to dependants and to your estate. The disadvantage is that death benefits may be paid ultimately to those not intended to benefit from your superannuation.

A statement of wishes is a written nomination indicating how you wish to have all, or part of the benefit paid to a particular dependant. For example, it may allow you to direct certain investments such as listed shares, or a particular property owned by the fund transferred to a particular dependant.

Does the Super Concepts trust deed permit binding death benefit nominations?

Yes, clauses 50 and 51 of the Super Concepts trust deed permit the trustee to pay death benefits to your dependants and/or to your estate as nominated. Death benefits may be paid as a lump sum or pension to dependants that you nominate, and/or your estate. The amount to be paid to a beneficiary can be a particular amount or a percentage of the total amount of your death benefit.

What information is a trustee required to provide to a member when completing a binding death benefit nomination?

Under the Super Concepts trust deed, a trustee is required to provide you with sufficient information that allows you to understand what is requred to make a death benefit nomination. This would include the types of nominations available such as lapsing or non-lapsing nominations, the categories of people to whom death benefits can be paid, and whether a lump sum or pension is available to the nominee.

Is the trustee required to follow the member's death benefit nomination in all cases?

Where a valid binding death benefit nomination has been provided to the fund, a trustee is bound to follow the instructions provided in your death benefit nomination and to the extent permitted by the superannuation legislation. Where a binding death benefit nomination has lapsed or you have provided a non-binding nomination, the trustee has the option to act in accordance with that nomination.

Under the superannuation legislation, death benefits are permitted to be paid to your dependants at the time of death and your estate.  In some special cases where you may have died without dependants and did not indicate how the death benefit should be paid, it is possible to pay the death benefit to a person who is not a dependant or the executor of the person's estate after obtaining permission from the regulator.

Who can be nominated in the death benefit nomination?

The superannuation legislation permits a death benefit to be paid to your dependants and/or your estate and distributed in accordance with your will. Any death benefit nomination should only nominate people defined as dependants for purposes of the superannuation legislation or the person's estate. If the person nominated in the death benefit nomination is not a dependant at the time of your death, then it will be up to the trustee under the rules of the fund to decide how that amount, or part of the death benefit will be distributed.

As an example, let's assume a member has nominated their spouse in the death benefit nomination and at the time of the member's death they have divorced. Under the superannuation legislation the ex spouse is not considered a dependant for purposes of the Superannuation Industry (Supervision) Act 1993 (SIS Act) and the trustee is not permitted to pay the benefit nominated by the member to him or her. The trustee would therefore be required to distribute that part of the death benefit originally intended for the ex spouse to a person who was a dependant as at the date of death, or alternatively to your estate.

Who is a dependant for purposes of a death benefit nomination?

One of the purposes of superannuation is to provide for those who would or should receive ongoing financial support from the deceased, had he or she not died. It is for this reason that the superannuation legislation places restrictions on who may be paid a death benefit. In addition, the fund's trust deed may place further restrictions on the payment of death benefits. Death benefits may be paid to your dependant and/or your legal personal representative of the member's estate. The legal personal representative is the executor of the member's will or administrator of your estate.

A 'dependant' under the superannuation legislation includes:

• anyone who is dependent upon a member of the superannuation fund for support;
• the spouse of the member, including a legally married spouse and a de facto spouse;
• a child of the member, including an adopted child, step-child or an ex-nuptial child;
• a person with whom the member has an interdependency relationship immediately prior to the member's death.

The superannuation legislation provides no guidance to the meaning of what is meant by 'dependent upon the member of the superannuation fund for support'. It is up to the trustee of the fund to determine whether a person is dependent on the member for support. As a general rule financial dependency is the main basis of establishing support. It is the situation where the member has provided support to maintain the person's normal standard of living, and whether he or she was reliant on regular, continuous contributions from the deceased member to maintain that standard.

The regulator considers that there is no need for one person to be wholly dependent upon another for that person to be dependent. Financial dependency can be established where a person relies wholly, or in part on another, for his or her means of subsistence. There is no requirement for the recipient to show a need for financial dependency in order to qualify as a dependant.

An 'interdependency' relationship exists if two persons:

• have a close personal relationship; and
• 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.

In addition, an interdependency relationship exists if two persons have a close personal relationship but do not satisfy the other requirements because they are temporarily living apart or either or both of them suffer from a disability. For example, living apart would include a person working temporarily overseas or in jail.

Typically interdependency relationships could exist between:

• members of a same sex couple;
• siblings; or
• a parent and child (e.g. where the other parent has died or is suffering from ill-health)

It is relatively simple for trustees to determine whether two persons live together or provide each other with financial support. However, the meaning of a 'close personal relationship' or 'domestic and personal care' can be open to interpretation by individual trustees. The legislation assists trustees by specifying matters to be taken into account and circumstances in which an interdependency relationship exists.

Factors to be taken into account would include all of the circumstances surrounding the relationship such as:

• the duration of the relationship;
• whether or not a sexual relationship exists;
• ownership, use and acquisition of property;
• degree of mutual commitment to a shared life;
• care and support of children;
• reputation and public aspects of the relationship;
• degree of emotional support;
• extent to which the relationship is one of mere convenience;
• any evidence suggesting that the parties intend the relationship to be permanent.

It may also be worthwhile to obtain a statutory declaration signed by one of the members of the relationship to the effect that the person is, or was, in an interdependency relationship with the other person.

It is not necessary that each of the circumstances listed above is satisfied in order for an interdependency relationship to exist. Each factor is to be given the appropriate importance depending on the circumstances. The factors in the list merely provide guidance to fund trustees on what they should consider when determining whether an interdependency relationship exists. The final decision of the trustee is based on the facts on each case.

The legislation also deems a 'close personal relationship' to be a situation where "one or each person in the relationship provides the other with support and care of a type and quality normally provided in a close personal relationship, rather than by mere friend or flatmate". An example may be where significant care is provided for the other person when they are unwell or suffering emotionally.

The legislation specifically excludes two categories or people from the definition of who can be a party to an interdependency relationship. These are persons who may otherwise provide domestic support and personal care to the other:

• under an employment contract or a contract for services; or
• on behalf of another person or organisation such as a government agency, a body corporate or a benevolent or charitable organisation.

These exclusions are not intended to extend to people who would otherwise meet the requirements of interdependency, but are receiving a carer's allowance or similar from a government agency or other organisation.

Interestingly, the Government does not expect adult children living at home with their parents to ordinarily meet the conditions of an interdependency relationship.

Trustees ultimately decide whether an interdependency relationship exists. The existence of a statutory declaration is only one of the factors taken into consideration by trustees and therefore it is important that evidence of financial support by either party exists, where parties are not seperated by illness or temporarily living apart.

I am a member of a same sex couple. Is it possible for me to nominate my partner?

Yes, it is possible for you to nominate your partner if you are a member of a same sex couple, if your partner is dependant upon you for support, or you and your partner are considered to be in an interdependency relationship.

The government has legislation currently before the parliament which is designed to treat same sex relationships in a similar manner to married and de facto relationships for superannuation and other purposes.  As at October 2008 it is not known when the legislation will become law.

Can I nominate a beneficiary to receive a pension or lump sum from my superannuation fund?

Yes, it is possible for you to require the trustee to pay a pension or a lump sum, or a combination to the benficiary you nominated. Of course, your beneficiary will need to be a dependant at the time of your death to be eligible to receive your death benefit.

Can I nominate a beneficiary to receive a proportion of my superannuation benefit?

Yes, it is possible for you to nominate that your dependants and/or your estate receive a proportion of your benefit or a particular amount on your death. The choice of how you wish your benefit to be paid to your dependants is up to you. For example, you may wish that your surviving spouse receive your benefit partly as a lump sum and the remainder used to commence a pension.

Does a death benefit nomination need to be in writing?

Yes, just like your will it is necessary for you to put your death benefit nomination in writing. The directions in your nomination should be clear so there is no doubt as to the type of benefit and to whom the benefits are to be paid. The death benefit nomination should be sent to the trustee of the fund and be held in the fund records.

Does a death benefit nomination need to be signed by the member?

Yes, just like your will, any contract to which you are a party, or any other document that you wish to be legally binding, it is necessary that the person identified as making the nomination has signed the document. In addition, the nomination should be witnessed and signed to attest to the fact that it is your signature on the nomination form.

Does a binding death benefit nomination need to be witnessed?

Where a member of a self managed superannuation fund provides a death benefit nomination to the trustee, it is useful to have it witnessed so that someone can attest that you are the person who signed the nomination. The witness should be a person who is legally competent, that is, a person who is 18 or older and mentally competent.

In the case of some binding death benefit nominations involving larger superannuation funds, it is a requirement that the nomination be witnessed by two people who are age 18 or over and are not mentioned in the nomination.

Does a death benefit nomination need to be reviewed?

It is advisable to review a lapsing and non-lapsing binding death benefit nomination regularly, say annually. As a minimum, a lapsing binding nomination should be reviewed prior to the date it lapses. The reason for reviewing the nomination is that as your domestic situation changes, different people may become or cease to be dependants. Examples of new dependants could include the birth of a child, marriage or entering into a relationship. Those situations where a person may cease to be a dependant would include the end of a relationship, someone ceases to be dependent on you for support, or death of a dependant.

I wish to have all my superannuation benefits paid to my estate and distributed under my will. Is that possible?

Yes, it is possible to provide a nomination to the trustee of the fund that your superannuation benefits are paid to your estate.

Before your superannuation benefit is distributed in this way you should be aware of the implications. If a superannuation benefit is paid to dependants from your fund there is less likelihood they will be challenged as they do not form part of your estate. If your death benefit is distributed in accordance with your will the amount becomes part of your estate.

How long does a binding death benefit nomination last?

There are at least two types of binding nominations you can use - the lapsing death benefit nomination and the non-lapsing binding nomination. The lapsing nomination lasts as long as you wish, for example, you may have the nomination last for two, three, or more years after which time it needs to be renewed. If it is not renewed after that time then it can be used as a non-binding nomination. As a non-binding nomination, it is up to the trustee of the fund whether they act in accordance with the nomination you have provided or not.

A non-lapsing death benefit nomination lasts as long as you wish, or until you decide to revoke or modify it. It is worthwhile to review your non-lapsing nomination regularly to ensure it reflects your preferences and your domestic situation from time to time.

I wish to nominate my spouse and children to each receive part of my death benefit. If one of the children is not alive at my death then I would like one of the grandchildren to receive their proportion of the benefit. Is this possible?

Superannuation death benefits are able to be paid only to dependants and/or to your estate. Your spouse and children are automatically included as your dependants. However, if it was desired that the grandchildren benefit from the superannuation fund, they would need to be dependent on you for support as a grandparent to be eligible to receive the death benefit.

I pay for the school fees for one of my grandchildren. Are they considered to be a dependant for purposes of the SIS Act?

A 'dependant' for purposes of the SIS legislation includes a person who is ordinarily dependant upon you for support. The definition also includes your spouse or child and anyone with whom you have an interdependency relationship. As a general rule, a grandchild who lives with their parents or other guardian would not be considered to be ordinarily dependent upon the grandparent for support in a situation where the grandparent merely pays for the grandchild's education, or some other isolated expenses out of love and affection.

What is the role of a statement of wishes?

A statement of wishes is a non-binding instruction to the trustee of your superannuation fund which indicates how you would like benefits to be paid to various dependants upon your death. In some cases you may wish that particular investments of the fund are transferred to one of your dependants. An example could be certain shares or a business property in which one of your dependants may be conducting a business. If you think a statement of wishes is something you would consider for your fund, it is recommended you obtain legal advice to ensure the wording of the statement is appropriate.

The ATO has recently published a draft self managed superannuation fund determination about binding death benefit nominations (SMSFD 2008/D1). What does that mean for trustees of self managed superannuation funds?

The draft self managed superannuation fund determination provides the Commissioner's interpretation of the SIS Act as it applies to self managed superannuation funds. These determinations are not binding, however, provide a guide on how the Commissioner is expected to apply the law in various circumstances.

SMSFD 2008/D1 provides the Commissioner's interpretation of sections 58 and 59 of the SIS Act as well as SIS Regulation 6.17A. These provisions allow a member to make a death benefit nomination.

Section 58 of the SIS Act permits a member of a superannuation fund with less than five members, such as self managed fund or small APRA fund, to direct the trustee to act in a particular way. The direction also depends on whether the death benefit nomination can be made in terms of the fund's trust deed. Clauses 50 and 51 of the Super Concepts trust deed permit the trustee to accept a death benefit nomination from a member and act in accordance with that direction. This provides a flexible range of options and applies to binding and non-binding death benefit nominations, as well as lapsing and non-lapsing nominations.

Section 59 is considered by the Commissioner to apply to a fund other than self managed superannuation funds and small APRA funds. Under those provisions, any direction by a member for the exercise of the trustee's discretion requires trustee's consent in most cases. It is only where a member provides a binding death benefit nomination in accordance with Regulation 6.17A, and in accordance with the trust deed, that the trustee is bound to follow that nomination. A binding death benefit nomination under Regulation 6.17A provides a set of rules which are required to be followed precisely. That is, the nomination must:

• be in writing;
• nominate the relevant dependants and/or the member's estate;
• state the proportion of the benefit to be paid to the party nominated;
• be signed by the member; and
• be witnessed by two people 18 or older who are not mentioned in the nomination.

Any binding death benefit nomination under Reg 6.17A lapses after three years or a shorter period if fixed by the fund's trust deed. The nomination also lapses if it has been amended or revoked within the three years from commencement or, if shorter, the period set in the deed.

I have commenced an account based pension from my self managed superannuation fund which pays a reversionary pension to my spouse on my death. If I was to make binding death benefit nomination, what would be its status?

Once a pension has commenced, a contract is made between you as the pensioner and the trustee of the fund, to pay the pension as agreed. If the terms of the pension permit it to continue to a dependant after your death, (referred to as a reversionary pension) it over-rides any death benefit nomination that you have made in respect of that pension.

In some cases the pension may only be payable for your life and it may be up to the dependant to choose whether it will continue as a pension, lump sum or combination of both. You would need to consider the terms of the pension agreement in these circumstances, in order to determine whether the amount remaining on your death amounts to a reversion of the pension. If it does then it would over-ride any binding death benefit nomination you have made in relation to that part of the death benefit.

It is possible where a member has commenced a pension, including a reversion to dependants, and has an amount in accumulation phase, that a binding death benefit nomination can be made in respect of the amount in accumulation phase.

What happens if a dependant I nominate in the binding death benefit nomination dies before I do?

If you nominate a dependant and that person is not living at the time of your death, then the amount or proportion of the benefit payable will be distributed to other dependants as you have directed. If you have not made any directon in this regard, then any amount remaining after the trustee has administered your death benefit nomination will be distributed in accordance with the terms of the fund's trust deed.

As an example, let's assume Joanne has made a binding death benefit nomination to have her spouse, Mark, and her three children each receive 25% of her death benefit. At the time of Joanne's death her spouse, Mark, has also passed away. This means that each child will receive 25% of Joanne's death benefit and the amount she has nominated for Mark to receive will be administered in accordance with the fund's trust deed. This could mean that the amount payable to Mark is divided equally among the children or could be paid to her estate to be administered as directed in her will.

This is similar to the situation where you may nominate a person who is a dependant at the time you make the death benefit nomination, but at the time of your death, has ceased to be dependent upon you for support, or someone with whom you have an interdependency relationship.

I have a binding death benefit that nominates my spouse as receiving all of my benefits. What happens if we both die in an accident at the same time?

In Australia where two people, such as a husband and wife, die at the same time the elder one is deemed to have died first. This means if you have made a binding death benefit nomination and you nominate a person who has died at the same time the elder is deemed to have died first.

Let's assume Rob and Sandra are husband and wife. Rob is the elder of the couple. They both die in a car accident. Rob has made a binding death benefit nomination that Sandra receives all of his superannuation benefit. In this case, the superannuation benefit will be notionally distributed to Sandra from the fund and included in her estate for distribution in accordance with her will.

If we assume Sandra was older than Rob, Sandra is deemed to have died first, and as such his benefit would be distributed in accordance with the general provisions of the fund's trust deed. This is because the binding death benefit nomination has ceased to have effect due to Sandra being deemed to have died before Rob.

I have made a non-lapsing binding death benefit nomination which includes my ex spouse. Will the superannuation fund pay the benefit nominated to my ex spouse if I was to die?

No, the superannuation fund is not authorised to pay your death benefit to your ex spouse. Under the SIS Act a dependant does not include an ex spouse. As the trustee is only permitted to pay death benefits to dependants or the estate of the deceased member, it is not possible to pay a superannuation death benefit to an ex spouse.